PROSPECTUS SUPPLEMENT dated July 26, 2004 (to Prospectus dated April 23, 2004)
$300,114,000 (APPROXIMATE)
CHEC LOAN TRUST 2004-1
ASSET-BACKED CERTIFICATES, SERIES 2004-1
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
CENTEX HOME EQUITY COMPANY, LLC
ORIGINATOR AND SERVICER
__________________________ Only the twelve classes of certificates identified below are being offered
by this prospectus supplement and the accompanying prospectus.
CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING ON THE OFFERED CERTIFICATES
PAGE S-9 IN THIS
PROSPECTUS SUPPLEMENT AND o Represent ownership interests in a trust consisting of a pool of first
ON PAGE 6 IN THE and second lien fixed-rate and adjustable-rate residential mortgage loans.
PROSPECTUS.
o The offered certificates will accrue interest at a rate equal to
The certificates represent one-month LIBOR plus the related fixed margin, subject to certain
obligations of the trust limitations described in this prospectus supplement.
only and do not represent
an interest in or
obligation of Financial CREDIT ENHANCEMENT
Asset Securities Corp.,
Centex Home Equity o Subordination as described in this prospectus supplement under
Company, LLC or any of "Description of the Certificates--Subordination."
their affiliates. This
prospectus supplement may o Excess Interest as described in this prospectus supplement under
be used to offer and sell "Description of the Certificates--Overcollateralization Provisions."
the certificates only if
accompanied by the o Overcollateralization as described in this prospectus supplement under
prospectus. "Description of the Certificates--Overcollateralization Provisions."
__________________________
ORIGINAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE RATE(1)
----------------- -------------------- ------------
Class A-1........ $ 80,000,000 Variable
Class A-2........ $140,000,000 Variable
Class A-3........ $ 32,157,000 Variable
Class M-1........ $ 9,746,000 Variable
Class M-2........ $ 8,818,000 Variable
Class M-3........ $ 5,569,000 Variable
Class M-4........ $ 4,796,000 Variable
Class M-5........ $ 4,486,000 Variable
Class M-6........ $ 4,486,000 Variable
Class M-7........ $ 3,713,000 Variable
Class M-8........ $ 3,249,000 Variable
Class M-9........ $ 3,094,000 Variable
- ----------------
(1) Determined as described under "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement and subject
to limitation or increase under certain circumstances.
Greenwich Capital Markets, Inc. and WaMu Capital Corp. (the "Underwriters") will
offer the offered certificates from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Depositor from the sale of the offered certificates,
before deducting expenses and underwriting fees, will be approximately
$300,045,835. The Underwriters' commission will be any positive difference
between the price it pays to the Depositor for the offered certificates and the
amount it receives from the sale of such certificates to the public. See "Method
of Distribution" in this prospectus supplement.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Delivery of the offered certificates will be made in book-entry form through the
facilities of The Depository Trust Company, and upon request through the
facilities of Clearstream Banking Luxembourg and the Euroclear System on or
about July 29, 2004.
RBS GREENWICH CAPITAL WAMU CAPITAL CORP.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY OF TERMS.............................................................S-3
RISK FACTORS.................................................................S-9
THE MORTGAGE POOL...........................................................S-16
CENTEX HOME EQUITY COMPANY, LLC.............................................S-29
THE SELLER..................................................................S-35
THE POOLING AGREEMENT.......................................................S-35
DESCRIPTION OF THE CERTIFICATES.............................................S-41
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS...............................S-64
USE OF PROCEEDS.............................................................S-82
FEDERAL INCOME TAX CONSEQUENCES.............................................S-82
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS...................................S-85
LEGAL INVESTMENT CONSIDERATIONS.............................................S-86
METHOD OF DISTRIBUTION......................................................S-86
LEGAL MATTERS...............................................................S-87
RATINGS.....................................................................S-87
INDEX OF DEFINED TERMS......................................................S-88
ANNEX I......................................................................I-1
S-2
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND
DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN
MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE
OFFERING OF THE CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND
THE ACCOMPANYING PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS
QUALIFIED BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF
FORWARD-LOOKING STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR
PROJECTIONS AND OTHER FINANCIAL ITEMS. FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER FROM THE PROJECTED RESULTS. THOSE RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL
REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE BEYOND OUR
CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY DIFFERENT FROM
WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the Closing Date, CHEC Loan Trust 2004-1 will issue eighteen classes of
certificates, twelve of which are being offered by this prospectus supplement
and the accompanying prospectus. The assets of the trust that will support the
certificates will consist of a pool of fixed-rate and adjustable-rate, first and
second lien mortgage loans having the characteristics described in this
prospectus supplement. The Class A-1 Certificates, the Class A-2 Certificates,
the Class A-3 Certificates, the Class M-1 Certificates, the Class M-2
Certificates, the Class M-3 Certificates, the Class M-4 Certificates, the Class
M-5 Certificates, the Class M-6 Certificates, the Class M-7 Certificates, the
Class M-8 Certificates and the Class M-9 Certificates are the only classes of
offered certificates.
The offered certificates will be book-entry securities clearing through The
Depository Trust Company (in the United States) or upon request through
Clearstream Banking Luxembourg and the Euroclear System (in Europe) in minimum
denominations of $25,000.
OTHER CERTIFICATES
The trust will issue six additional classes of certificates. These certificates
will be designated as the Class B-1 Certificates, the Class B-2 Certificates,
the Class C Certificates, the Class P Certificates, the Class R Certificates and
the Class R-X Certificates and are not being offered to the public by this
prospectus supplement and the prospectus.
The Class B-1 Certificates are subordinate to the Offered Certificates. The
Class B-1 Certificates have an initial certificate principal balance of
$3,094,000. The Class B-1 Certificates will be sold to Greenwich Capital
Markets, Inc. on the closing date.
The Class B-2 Certificates are subordinate to the Offered Certificates and the
Class B-1 Certificates. The Class B-2 Certificates have an initial certificate
principal balance of $3,094,000. The Class B-2 Certificates will be sold to
Greenwich Capital Markets, Inc. on the closing date.
The Class C Certificates will have an initial certificate principal balance of
approximately $3,093,702, which is approximately equal to the initial
overcollateralization required by the pooling agreement. The Class C
Certificates initially evidence an interest of approximately 1.00% in the trust.
The Class C Certificates will be delivered to the Seller or its designee as
partial consideration for the mortgage loans.
The Class P Certificates will have an original certificate principal balance of
$100 and will not be entitled to distributions in respect of interest. The Class
P Certificates will be entitled to all prepayment charges received in respect of
the mortgage loans. The Class P Certificates will be delivered to the Seller or
its designee as partial consideration for the mortgage loans.
The Class R Certificates and the Class R-X Certificates will not have original
certificate principal balances and are the classes of certificates representing
the residual interests in the trust. The Class R Certificates and the Class R-X
Certificates will be sold to Greenwich Capital Markets, Inc. on the closing
date.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES-- GENERAL," "--BOOK-ENTRY
CERTIFICATES" AND "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
S-3
CUT-OFF DATE
July 1, 2004.
CLOSING DATE
On or about July 29, 2004.
THE DEPOSITOR
Financial Asset Securities Corp., a Delaware corporation and an affiliate of
Greenwich Capital Markets, Inc. WE REFER YOU TO "THE DEPOSITOR" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
ORIGINATOR AND SERVICER
Centex Home Equity Company, LLC, a Delaware limited liability company. Any
obligation specified to be performed by the master servicer in the prospectus is
an obligation to be performed by the servicer with respect to the mortgage
loans. WE REFER YOU TO "CENTEX HOME EQUITY COMPANY, LLC" AND "THE POOLING
AGREEMENT--THE SERVICER" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
SELLER
Greenwich Capital Financial Products, Inc., a Delaware corporation. WE REFER YOU
TO "THE SELLER" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
TRUSTEE
JPMorgan Chase Bank, a New York banking corporation. WE REFER YOU TO "THE
POOLING AGREEMENT--THE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o OFFERED CERTIFICATES
Class A Certificates and Mezzanine Certificates.
o CLASS A CERTIFICATES
Class A-1 Certificates, Class A-2 Certificates
and Class A-3 Certificates.
o MEZZANINE CERTIFICATES
Class M-1 Certificates, Class M-2 Certificates, Class M-3 Certificates,
Class M-4 Certificates, Class M-5 Certificates, Class M-6 Certificates,
Class M-7 Certificates, Class M-8 Certificates and Class M-9
Certificates.
o CLASS B CERTIFICATES
Class B-1 Certificates and Class B-2 Certificates.
o SUBORDINATE CERTIFICATES
Mezzanine Certificates, Class B Certificates and Class C Certificates.
o RESIDUAL CERTIFICATES
Class R Certificates and Class R-X Certificates.
MORTGAGE LOANS
On the Closing Date the trust will acquire a pool of first and second lien,
fixed-rate and adjustable-rate mortgage loans. The mortgage loans will consist
of approximately 2,689 mortgage loans described in this prospectus supplement
and having an aggregate principal balance as of the Cut-off Date of
approximately $309,395,802 (the "Mortgage Loans").
The statistical information in this prospectus supplement reflects the
characteristics of the Mortgage Loans as of the Cut-off Date. After the date of
this prospectus supplement and prior to the Closing Date, additional mortgage
loans may be added to the mortgage pool and some mortgage loans may be removed
from the mortgage pool, as described under "The Mortgage Pool" in this
prospectus supplement. The Depositor believes that the information set forth in
this prospectus supplement is representative of the characteristics of the
mortgage pool as it will be constituted at the Closing Date, although certain
characteristics of the Mortgage Loans may vary.
The Mortgage Loans have the following characteristics (with all figures being
approximate and all percentages and weighted averages being based on scheduled
principal balances as of the Cut-off Date):
S-4
Mortgage Loans with Prepayment
Charges: 62.82%
Fixed-Rate Mortgage Loans: 35.79%
Adjustable-Rate Mortgage Loans: 64.21%
Range of Remaining Term 59 months to
to Stated Maturities: 360 months
Weighted Average Remaining Term to
Stated Maturity: 341 months
Range of Original Principal Balances: $5,000 to $782,363
Average Original Principal Balance: $115,291
Range of Outstanding Principal
Balances: $4,963 to $781,561
Average Outstanding Principal
Balance: $115,060
Range of Current Mortgage Rates: 4.250% to 14.750%
Weighted Average Current Mortgage
Rate: 7.299%
Weighted Average Gross Margin of
the Adjustable-Rate Mortgage Loans: 7.411%
Weighted Average Maximum
Mortgage Rate of the Adjustable-Rate
Mortgage Loans: 14.101%
Weighted Average Minimum
Mortgage Rate of the Adjustable-Rate
Mortgage Loans: 7.126%
Weighted Average Initial Periodic
Rate Cap of the Adjustable-Rate
Mortgage Loans: 2.204%
Weighted Average Periodic Rate Cap
of the Adjustable-Rate Mortgage
Loans: 1.039%
Weighted Average Time Until Next
Adjustment Date for the Adjustable-
Rate Mortgage Loans: 24 months
Balloon Mortgage Loans: 1.11%
Geographic Concentration in Excess of 5%:
California 19.11%
Texas 9.36%
Florida 7.66%
DISTRIBUTION DATES
The Trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in August 2004 (each, a "Distribution Date") (i) to the
holder of record of the certificates as of the business day preceding such date
of distribution, in the case of the certificates held in book-entry form or (ii)
to the holder of record of the certificates as of the last business day of the
month immediately preceding the month in which the distribution occurs, in the
case of the certificates held in registered, certificated form. If the 25th day
of a month is not a business day, then the distribution will be made on the next
business day.
DISTRIBUTIONS ON THE CERTIFICATES
INTEREST DISTRIBUTIONS
The pass-through rate for the Offered Certificates and the Class B Certificates
will be calculated at the per annum rate of One-Month LIBOR plus the related
margin as set forth below, subject to the limitations set forth in this
prospectus supplement.
Margin
---------------------
Class (1) (2)
----- ------- --------
A-1 0.120% 0.240%
A-2 0.300% 0.600%
A-3 0.500% 1.000%
M-1 0.600% 0.900%
M-2 0.650% 0.975%
M-3 0.700% 1.050%
M-4 1.100% 1.650%
M-5 1.200% 1.800%
M-6 1.400% 2.100%
M-7 1.850% 2.775%
M-8 2.000% 3.000%
M-9 3.500% 5.250%
B-1 3.500% 5.250%
B-2 3.500% 5.250%
- ----------------
(1) For each Distribution Date up to and including the Optional Termination
Date, as defined in this prospectus supplement under "Pooling and
Servicing Agreement--Termination."
(2) On each Distribution Date after the Optional Termination Date.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PASS- THROUGH RATES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
Interest distributable on the certificates accrues during an accrual period. The
accrual period for the Offered
S-5
Certificates and the Class B Certificates for any Distribution Date is the
period from the previous Distribution Date (or, in the case of the first accrual
period from the Closing Date) to the day prior to the current Distribution Date.
Interest will be calculated for the Offered Certificates and the Class B
Certificates on the basis of the actual number of days in the accrual period,
based on a 360-day year.
The Offered Certificates and the Class B Certificates will accrue interest on
their certificate principal balance outstanding immediately prior to each
Distribution Date.
The Class C Certificates will accrue interest as provided in the pooling
agreement. The Class P Certificates and the Residual Certificates will not
accrue interest.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
PRINCIPAL DISTRIBUTIONS
Principal will be distributed to the holders of each class of Offered
Certificates and Class B Certificates on each Distribution Date in the amounts
described herein under "Description of the Certificates--Allocation of Available
Funds."
DISTRIBUTION PRIORITIES
In general, on any Distribution Date, funds available for distribution from
payments and other amounts received on the Mortgage Loans will be distributed as
follows:
INTEREST DISTRIBUTIONS
to distribute interest on the Class A Certificates; and
to distribute interest on the Mezzanine Certificates and the Class B
Certificates, but only in the order of priority, amounts and to the extent
described herein;
PRINCIPAL DISTRIBUTIONS
to distribute principal on the Class A Certificates; and
to distribute principal on the Mezzanine Certificates and the Class B
Certificates,
but in each case, only in the order of priority, amounts and to the extent
described herein.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
ADVANCES
The Servicer will make cash advances to cover delinquent payments of principal
and interest on each Mortgage Loan to the extent it reasonably believes that the
cash advances are recoverable from future payments on such related Mortgage
Loan. Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses.
WE REFER YOU TO "THE POOLING AGREEMENT--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE SECURITIES--ADVANCES" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
OPTIONAL TERMINATION
The party designated in the pooling agreement may purchase all of the Mortgage
Loans and any REO Properties and retire the certificates when the aggregate
current principal balance of the Mortgage Loans and REO Properties is equal to
or less than 10% of the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date.
WE REFER YOU TO "THE POOLING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES--PASS-THROUGH RATES" IN THIS PROSPECTUS SUPPLEMENT AND "THE
AGREEMENTS--TERMINATION; OPTIONAL TERMINATION" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
CREDIT ENHANCEMENT
1. SUBORDINATION
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described in this prospectus
supplement, to the rights of the holders of the Class A Certificates.
In addition, the rights of the holders of Mezzanine Certificates with higher
numerical class designations to receive distributions will be subordinated to
the rights of the holders of the Mezzanine Certificates with lower numerical
class designations, and the rights of the holders of the Class B Certificates
and the Class C Certificates to receive distributions will be subordinated to
the rights of the holders of the Mezzanine Certificates, in each case to the
extent described in this prospectus supplement.
S-6
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the Mortgage Loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--SUBORDINATION" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
2. EXCESS INTEREST
The Mortgage Loans bear interest each month that in the aggregate is expected to
exceed the amount needed to distribute monthly interest on the Offered
Certificates and the Class B Certificates and to pay certain fees and expenses
of the trust. Such excess interest will be available to absorb realized losses
on the Mortgage Loans and to maintain overcollateralization at required levels
as described in the pooling agreement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
AND "--OVERCOLLATERALIZATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
3. OVERCOLLATERALIZATION
As of the Closing Date, the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date will exceed the aggregate certificate principal balance of
the Offered Certificates, the Class B Certificates and the Class P Certificates
by approximately $3,093,702, which is approximately equal to the initial
certificate principal balance of the Class C Certificates. Such amount
represents approximately 1.00% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, and is the approximate amount of initial
overcollateralization required to be provided under the pooling agreement. We
cannot assure you that sufficient interest will be generated by the Mortgage
Loans to maintain the required level of overcollateralization.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION
PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
4. ALLOCATION OF LOSSES
If, on any Distribution Date, there is not sufficient excess interest or
overcollateralization to absorb realized losses on the Mortgage Loans as
described under "Description of the Certificates-- Overcollateralization
Provisions" in this prospectus supplement, then realized losses on the Mortgage
Loans in excess of such amounts will be allocated first, to the Class B-2
Certificates, until the certificate principal balance thereof has been reduced
to zero, second, to the Class B-1 Certificates, until the certificate principal
balance thereof has been reduced to zero, third, to the Class M-9 Certificates,
until the certificate principal balance thereof has been reduced to zero,
fourth, to the Class M-8 Certificates, until the certificate principal balance
thereof has been reduced to zero, fifth, to the Class M-7 Certificates, until
the certificate principal balance thereof has been reduced to zero, sixth, to
the Class M-6 Certificates, until the certificate principal balance thereof has
been reduced to zero, seventh, to the Class M-5 Certificates, until the
certificate principal balance thereof has been reduced to zero, eighth, to the
Class M-4 Certificates, until the certificate principal balance thereof has been
reduced to zero, ninth, to the Class M-3 Certificates, until the certificate
principal balance thereof has been reduced to zero, tenth, to the Class M-2
Certificates, until the certificate principal balance thereof has been reduced
to zero and eleventh, to the Class M-1 Certificates, until the certificate
principal balance thereof has been reduced to zero. The pooling agreement does
not permit the allocation of realized losses on the Mortgage Loans to the Class
A Certificates, the Class P Certificates or the Residual Certificates; however
investors in the Class A Certificates should realize that under certain loss
scenarios there will not be enough interest and principal on the mortgage loans
to distribute to the Class A Certificates all interest and principal amounts to
which such certificates are then entitled.
If realized losses are allocated to the Mezzanine Certificates and the Class B
Certificates, such realized losses will not be reinstated thereafter (except in
the case of subsequent recoveries). However, the amount of any realized losses
allocated to the Mezzanine Certificates and the Class B Certificates may be
distributed to the holders of these certificates according to the priorities set
forth under "Description of the Certificates--Overcollateralization Provisions"
in this prospectus supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES --ALLOCATION OF LOSSES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
CAP CONTRACT
The Offered Certificates and the Class B Certificates will have the benefit of a
cap contract to pay amounts in respect of basis risk shortfalls on such classes
of
S-7
certificates. The cap contract requires the counterparty to make a payment to
the extent LIBOR for any interest accrual period exceeds the rate set forth in
the related cap contract, up to a maximum LIBOR of 10.00%, multiplied by the
notional amount set forth in the cap contract and adjusted for the actual number
of days in the related accrual period. Cap payments, if any, made by the
counterparty will be deposited in the Net WAC Rate Carryover Reserve Account and
will be available for distribution in respect of basis risk shortfall amounts on
the Offered Certificates and the Class B Certificates as set forth in this
prospectus supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CAP CONTRACT" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
RATINGS
It is a condition of the issuance of the Offered Certificates that they be
assigned the following ratings by Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"):
Moody's: S&P:
------------ --------
A-1.......... Aaa AAA
A-2.......... Aaa AAA
A-3.......... Aaa AAA
M-1.......... Aa1 AA+
M-2.......... Aa2 AA
M-3.......... Aa3 AA-
M-4.......... A1 A+
M-5.......... A2 A
M-6.......... A3 A-
M-7.......... Baa1 BBB+
M-8.......... Baa2 BBB
M-9.......... Baa3 BBB-
A security rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by any of the rating agencies.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "RATING" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
TAX STATUS
One or more elections will be made to treat designated portions of the trust
(exclusive of the Net WAC Rate Carryover Reserve Account and the cap contract as
described more fully herein) as real estate mortgage investment conduits for
federal income tax purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND "CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Offered Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met. A fiduciary of an employee
benefit plan must determine that the purchase of a certificate is consistent
with its fiduciary duties under applicable law and does not result in a
nonexempt prohibited transaction under applicable law.
WE REFER YOU TO "CONSIDERATIONS FOR BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS
SUPPLEMENT AND "ERISA CONSIDERATIONS" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "LEGAL INVESTMENT" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
S-8
RISK FACTORS
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment in
the certificates. You should also carefully consider the information set forth
under "Risk Factors" in the prospectus.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Mortgagors may prepay their Mortgage Loans in whole or in part at any
time. We cannot predict the rate at which mortgagors will repay their Mortgage
Loans. A prepayment of a Mortgage Loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the Mortgage Loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the mortgage rates on the fixed-rate
Mortgage Loans, the Mortgage Loans are more likely to prepay than if
prevailing rates remain above the mortgage rates on the Mortgage Loans.
In addition, if interest rates decline, adjustable-rate mortgage loan
prepayments may increase due to the availability of fixed-rate mortgage
loans or other adjustable-rate mortgage loans at lower interest rates.
Conversely, if prevailing interest rates rise significantly, the
prepayments on fixed-rate and adjustable- rate mortgage loans may
decrease. Furthermore, adjustable-rate mortgage loans may prepay at
different rates and in response to different factors than fixed-rate
mortgage loans; the inclusion of both types of mortgage loans in the
mortgage pool may increase the difficulty in analyzing possible
prepayment rates.
o Approximately 62.82% of the Mortgage Loans (by aggregate principal
balance of the Mortgage Loans as of the Cut-off Date) require the
mortgagor to pay a prepayment charge in certain instances if the
mortgagor prepays the Mortgage Loan during a stated period, which may
be from one year to five years after the Mortgage Loan was originated.
A prepayment charge may or may not discourage a mortgagor from
prepaying the Mortgage Loan during the applicable period.
o The Originator may be required to purchase Mortgage Loans from the
trust in the event certain breaches of representations and warranties
occur and have not been cured. In addition, the Servicer has the option
to purchase Mortgage Loans that become 90 days or more delinquent.
These purchases will have the same effect on the holders of the Offered
Certificates as a prepayment of the Mortgage Loans.
o The party designated in the pooling agreement may purchase all of the
Mortgage Loans and any REO Properties when the aggregate principal
balance of the Mortgage Loans and REO Properties is equal to or less
than 10% of the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date.
o If the rate of default and the amount of losses on the Mortgage Loans
is higher than you expect, then your yield may be lower than you
expect.
o As a result of the absorption of realized losses on the Mortgage Loans
by excess interest and overcollateralization as described herein,
liquidations of defaulted Mortgage Loans, whether or not realized
losses are incurred upon such liquidations, will result in an earlier
return of the principal of the Offered Certificates and the Class B
Certificates and will influence the yield on the Offered Certificates
and the Class B Certificates in a manner similar to the manner in which
principal prepayments on the Mortgage Loans will influence the yield on
the Offered Certificates and the Class B Certificates.
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o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the Offered
Certificates and the Class B Certificates then entitled to principal
distributions at any time that the overcollateralization provided by
the mortgage pool falls below the required level.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING
OF PREPAYMENTS ON THE MORTGAGE LOANS.
TERRORIST ATTACKS AND MILITARY ACTION COULD ADVERSELY AFFECT THE YIELD ON THE
OFFERED CERTIFICATES
The terrorist attacks in the United States on September 11, 2001
suggest that there is an increased likelihood of future terrorist activity in
the United States. In addition, the military conflict with Iraq has resulted in
a significant deployment of United States military personnel in the region.
Investors should consider the possible effects of past and possible future
terrorist attacks and any resulting military response by the United States on
the delinquency, default and prepayment experience of the Mortgage Loans. In
accordance with the servicing standard set forth in the pooling agreement, the
Servicer may defer, reduce or forgive payments and delay foreclosure proceedings
in respect of Mortgage Loans to borrowers affected in some way by past and
possible future events.
In addition, the current deployment of United States military personnel
in the Middle East and the activation of a substantial number of United States
military reservists and members of the National Guard may significantly increase
the proportion of Mortgage Loans whose mortgage rates are reduced by the
application of the Servicemembers Civil Relief Act (the "Relief Act") or state
laws providing for similar relief. See "Material Legal Aspects of the
Loans--Servicemembers Civil Relief Act" in the prospectus. Shortfalls in
interest collections arising from the application of the Relief Act or any state
law providing for similar relief will not be covered by the Servicer or any
subservicer.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE OFFERED CERTIFICATES
The credit enhancement features described in the summary of this
prospectus supplement are intended to enhance the likelihood that holders of the
Class A Certificates, and to a limited extent, the holders of the Mezzanine
Certificates and the Class B Certificates, will receive regular distributions of
interest and principal. However, we cannot assure you that the applicable credit
enhancement will adequately cover any shortfalls in cash available to pay your
certificates as a result of delinquencies or defaults on the Mortgage Loans. If
delinquencies or defaults occur on the Mortgage Loans, neither the Servicer nor
any other entity will advance scheduled monthly payments of interest and
principal on delinquent or defaulted Mortgage Loans if such advances are not
likely to be recovered.
If substantial losses occur as a result of defaults and delinquent
payments on the Mortgage Loans, you may suffer losses.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN
OVERCOLLATERALIZATION
The Mortgage Loans are expected to generate more interest than is
needed to distribute interest owed on the Offered Certificates and the Class B
Certificates and to pay certain fees and expenses of the trust. Any remaining
interest generated by the Mortgage Loans will then be used to absorb losses that
occur on the Mortgage Loans. After these financial obligations of the trust are
covered, the available excess interest generated by the Mortgage Loans will be
used to maintain overcollateralization. We cannot assure you, however, that
enough excess interest will be generated to absorb losses that occur on the
Mortgage Loans or maintain the required level of overcollateralization. The
factors described below will affect the amount of excess interest that the
Mortgage Loans will generate:
o Every time a Mortgage Loan is prepaid in full, liquidated or written
off, excess interest may be reduced because the Mortgage Loan will no
longer be outstanding and generating interest or, in the case of a
partial prepayment, will be generating less interest.
o If the rates of delinquencies, defaults or losses on the Mortgage Loans
turn out to be higher than expected, excess interest will be reduced by
the amount necessary to compensate for any shortfalls in cash available
to make required distributions on the Offered Certificates and the
Class B Certificates.
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o The fixed-rate Mortgage Loans have mortgage rates that are fixed and
will not adjust based on any index and the adjustable-rate Mortgage
Loans have mortgage rates that adjust based on an index that is
different from the index used to determine the pass-through rates on
the Offered Certificates and the Class B Certificates. In
addition, (i) the first adjustment of the rates for approximately
84.11% of the adjustable-rate Mortgage Loans (by aggregate principal
balance of the adjustable-rate Mortgage Loans as of the Cut-off Date),
will not occur until two years after the date of origination and (ii)
the first adjustment of the rates for approximately 15.24% of the
adjustable-rate Mortgage Loans (by aggregate principal balance of the
adjustable-rate Mortgage Loans as of the Cut-off Date), will not occur
until three years after the date of origination. As a result, the pass-
through rate on the Offered Certificates and the Class B Certificates
may increase relative to the mortgage rates on the Mortgage Loans, or
may remain constant as the mortgage rates on the adjustable-rate
Mortgage Loans decline. In either case, increases in the pass-through
rates on the Offered Certificates and the Class B Certificates would
require that more of the interest generated by the Mortgage Loans be
applied to cover interest on the Offered Certificates and the Class B
Certificates.
o If prepayments, defaults and liquidations occur more rapidly on the
Mortgage Loans with relatively higher mortgage rates than on the
Mortgage Loans with relatively lower mortgage rates, the amount of
excess interest generated by the Mortgage Loans will be less than would
otherwise be the case.
EFFECT OF MORTGAGE RATES ON THE OFFERED CERTIFICATES
The Offered Certificates and the Class B Certificates accrue interest
at pass-through rates based on the one- month LIBOR index plus specified
margins, but are subject to a limit. The limit on the pass-through rates on the
Offered Certificates and the Class B Certificates is based on the weighted
average of the mortgage rates on the Mortgage Loans net of the servicing fee and
the trustee fee.
The adjustable-rate Mortgage Loans have mortgage rates that adjust
based on a six-month LIBOR index. The adjustable-rate Mortgage Loans have
periodic and maximum limitations on adjustments to their mortgage rates, and
substantially all of the adjustable-rate Mortgage Loans will have the first
adjustment to their mortgage rates generally two years or three years after the
origination thereof. The fixed-rate Mortgage Loans have mortgage rates that will
not adjust. As a result of the limit on the pass-through rates on the Offered
Certificates and the Class B Certificates, such certificates may accrue less
interest than they would accrue if their pass-through rates were based solely on
the one-month LIBOR index plus the specified margin.
A variety of factors could limit the pass-through rates on the Offered
Certificates and the Class B Certificates. Some of these factors are described
below:
o The pass-through rates for the Offered Certificates and the Class B
Certificates adjust monthly while the mortgage rates on the
adjustable-rate Mortgage Loans adjust less frequently and the mortgage
rates on the fixed- rate Mortgage Loans do not adjust. Furthermore,
substantially all of the adjustable-rate Mortgage Loans will have the
first adjustment to their mortgage rates two years or three years
following their origination. Consequently, the limit on the
pass-through rates on the Offered Certificates and the Class B
Certificates may prevent any increases in the pass-through rates on
such certificates for extended periods in a rising interest rate
environment.
o If prepayments, defaults and liquidations occur more rapidly on the
Mortgage Loans with relatively higher mortgage rates than on the
Mortgage Loans with relatively lower mortgage rates, the pass-through
rates on the Offered Certificates and the Class B Certificates are more
likely to be limited.
o With respect to the Offered Certificates and the Class B Certificates,
the index used to determine the mortgage rates on the adjustable-rate
Mortgage Loans may respond to different economic and market factors
than does one-month LIBOR. It is possible that the mortgage rates on
certain of the adjustable-rate Mortgage Loans may decline while the
pass-through rates on the Offered Certificates and the Class B
Certificates are stable or rising. It is also possible that the
mortgage rates on the adjustable-rate Mortgage Loans and the
pass-through rates
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on the Offered Certificates and the Class B Certificates may both
decline or increase during the same period, but that the pass-through
rates on such Offered Certificates and the Class B Certificates may
decline more slowly or increase more rapidly.
If the pass-through rates on the Offered Certificates and the Class B
Certificates are limited for any Distribution Date, the resulting basis risk
shortfalls may be recovered by the holders of these certificates on such
Distribution Date or future Distribution Dates to the extent that on such
Distribution Date or future Distribution Dates there are available funds
remaining after certain other distributions on the Offered Certificates and the
Class B Certificates and the payment of certain fees and expenses of the trust.
RISKS ASSOCIATED WITH THE MEZZANINE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the
Mezzanine Certificates will be progressively more sensitive, in increasing order
of their numerical class designations, to the rate and timing of mortgagor
defaults and the severity of ensuing losses on the Mortgage Loans. If the actual
rate and severity of losses on the Mortgage Loans is higher than those assumed
by an investor in such certificates, the actual yield to maturity of such
certificates may be lower than the yield anticipated by such holder based on
such assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Mortgage Loans are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized losses on the Mortgage Loans, to the
extent they exceed the amount of excess interest and overcollateralization
following distributions of principal on the related Distribution Date, will
reduce the certificate principal balances of the Class B Certificates and then
will reduce the certificate principal balance of the class of Mezzanine
Certificate then outstanding with the highest numerical class designation. As a
result of such reductions, less interest will accrue on such class of Mezzanine
Certificates than would otherwise be the case. Once a realized loss is allocated
to a Mezzanine Certificate, no principal or interest will be distributable with
respect to such written down amount (except in the case of subsequent
recoveries). However, the amount of any realized losses allocated to the
Mezzanine Certificates may be distributed to the holders of the Mezzanine
Certificates according to the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
Unless the aggregate certificate principal balance of the Class A
Certificates has been reduced to zero, the Mezzanine Certificates and the Class
B Certificates will not be entitled to any principal distributions until at
least August 2007 or a later date as provided in this prospectus supplement or
during any period in which delinquencies or realized losses on the Mortgage
Loans exceed certain levels. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated among all of the certificates at the
same time. As a result of the longer weighted average lives of the Mezzanine
Certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if certain delinquency levels occur, it is possible for
such certificates to receive no principal distributions even if no losses have
occurred on the Mortgage Loans.
In addition, the multiple class structure of the Mezzanine Certificates
causes the yield of such classes to be particularly sensitive to changes in the
rates of prepayment of the Mortgage Loans. Because distributions of principal
will be made to the holders of such certificates according to the priorities
described in this prospectus supplement, the yield to maturity on such classes
of certificates will be sensitive to the rates of prepayment on the Mortgage
Loans experienced both before and after the commencement of principal
distributions on such classes. The yield to maturity on such classes of
certificates will also be extremely sensitive to losses due to defaults on the
Mortgage Loans (and the timing thereof), to the extent such losses are not
covered by excess interest, overcollateralization or a class of Mezzanine
Certificates with a higher numerical class designation. Furthermore, as
described in this prospectus supplement, the timing of receipt of principal and
interest by the Mezzanine Certificates may be adversely affected by losses even
if such classes of certificates do not ultimately bear such loss.
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PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a Mortgage Loan is prepaid, the mortgagor is charged interest on
the amount prepaid only up to the date on which the prepayment is made, rather
than for an entire month. This may result in a shortfall in interest collections
available for distribution on the next Distribution Date. The Servicer is
required to cover a portion of the shortfall in interest collections that are
attributable to prepayments, but only up to the amount of the Servicer's
servicing fee. In addition, certain shortfalls in interest collections arising
from the application of the Relief Act will not be covered by the Servicer.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Servicer will be allocated, first,
to the interest distribution amount with respect to the Class C Certificates,
and thereafter, to the Monthly Interest Distributable Amounts with respect to
the Offered Certificates and the Class B Certificates on a PRO RATA basis based
on the respective amounts of interest accrued on such certificates for such
Distribution Date. THE HOLDERS OF THE OFFERED CERTIFICATES AND THE CLASS B
CERTIFICATES WILL NOT BE ENTITLED TO REIMBURSEMENT FOR ANY INTEREST SHORTFALLS
RESULTING FROM THE APPLICATION OF THE RELIEF ACT OR ANY PREPAYMENT INTEREST
SHORTFALLS. IF THESE SHORTFALLS ARE ALLOCATED TO THE OFFERED CERTIFICATES OR THE
CLASS B CERTIFICATES, SUCH SHORTFALLS WILL BE ALLOCATED ON A PRO RATA BASIS,
ADVERSELY AFFECTING THE YIELD ON YOUR INVESTMENT.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
PRINCIPAL BALANCE OF MORTGAGE LOANS
Substantial delays could be encountered in connection with the
liquidation of delinquent Mortgage Loans. Further, reimbursement of advances
made on a Mortgage Loan, liquidation expenses such as legal fees, real estate
taxes, hazard insurance and maintenance and preservation expenses may reduce the
portion of liquidation proceeds distributable to you. If a mortgaged property
fails to provide adequate security for the Mortgage Loan, you will incur a loss
on your investment if the credit enhancements are insufficient to cover the
loss.
HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Approximately 57.15% of the Mortgage Loans (by aggregate principal
balance of the Mortgage Loans as of the Cut-off Date) have loan-to-value ratios
(or combined loan-to-value ratios in the case of any second lien Mortgage Loans)
in excess of 80.00% but no more than 100.00% at origination. Mortgage loans with
higher loan-to-value ratios (or combined loan-to-value ratios in the case of any
second lien Mortgage Loans) may present a greater risk of loss than mortgage
loans with loan-to-value ratios (or combined loan-to-value ratios in the case of
any second lien Mortgage Loans) of 80.00% or below. Additionally, the
Originator's determination of the value of a mortgaged property used in the
calculation of the loan-to-value ratios (or combined loan-to-value ratios in the
case of any second lien Mortgage Loans) of the Mortgage Loans may differ from
the appraised value of such mortgaged properties. See "Centex Home Equity
Company, LLC--Underwriting Standards" herein.
SIMULTANEOUS SECOND LIEN RISK
With respect to approximately 4.41% of the Mortgage Loans (by aggregate
principal balance of the Mortgage Loans as of the Cut-off Date), at the time of
origination of the first lien Mortgage Loan, the Originator also originated a
second lien mortgage loan which may or may not be included in the Trust. The
weighted average loan-to-value ratio of such Mortgage Loans is approximately
85.95%, and the weighted average combined loan-to-value ratio of such Mortgage
Loans (including the second lien) is approximately 98.60%. With respect to
Mortgage Loans that have second lien mortgage loans encumbering the same
Mortgaged Property, foreclosure frequency may be increased relative to Mortgage
Loans that do not have subordinate financing behind them since mortgagors have
less equity in the mortgaged property. In addition, the Servicer may declare a
default on the second lien loan even though the first lien loan is current which
would constitute a default on the first lien loan. In addition to the Mortgage
Loans discussed above that have simultaneous subordinate financing provided by
the Originator, with respect to certain other Mortgage Loans, at the time of
origination of the first lien Mortgage Loan, the related Mortgaged Property was
also encumbered by a second lien mortgage to a mortgagee other than the
Originator. Investors should also note that any mortgagor may
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obtain subordinate financing at any time subsequent to the date of origination
of their mortgage loan from the Originator or from any other lender.
BALLOON LOAN RISK
Balloon loans pose a risk because a mortgagor must make a large lump
sum payment of principal at the end of the loan term. If the mortgagor is unable
to pay the lump sum or refinance such amount, you may suffer a loss.
Approximately 1.11% of the Mortgage Loans (by aggregate principal balance of the
Mortgage Loans as of the Cut-off Date).
GEOGRAPHIC CONCENTRATION
The chart presented under "Summary of Terms--Mortgage Loans" lists the
states with the highest concentrations of Mortgage Loans.
In addition, the conditions below will have a disproportionate impact
on the Mortgage Loans in general:
o Economic conditions in states with high concentrations of Mortgage
Loans may affect the ability of mortgagors to repay their loans on time
even if such conditions do not affect real property values.
o Declines in the residential real estate markets in the states with high
concentrations of Mortgage Loans may reduce the values of properties
located in those states, which would result in an increase in
loan-to-value ratios.
o Any increase in the market value of properties located in the states
with high concentrations of Mortgage Loans would reduce loan-to-value
ratios and could, therefore, make alternative sources of financing
available to mortgagors at lower interest rates, which could result in
an increased rate of prepayment of the Mortgage Loans.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure, and require licensing of the Originator. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the mortgagors
regarding the terms of the Mortgage Loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the trust to damages and
administrative enforcement and could result in the borrowers rescinding such
Mortgage Loans against either the trust or subsequent holders of the Mortgage
Loans.
The Originator will represent that as of the Closing Date, each
Mortgage Loan is in compliance with applicable federal, state and local laws and
regulations. In the event of a breach of such representation, the Originator
will be
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obligated to cure such breach or repurchase or replace the affected Mortgage
Loan in the manner described under "The Pooling Agreement--Assignment of the
Mortgage Loans" in this prospectus supplement.
HIGH COST LOANS
None of the Mortgage Loans are "High Cost Loans" within the meaning of
the Home Ownership and Equity Protection Act of 1994 (the "Homeownership Act")
or any similar state or local law or regulation. See "Material Legal Aspects of
the Loans--Homeownership Act and Similar State Laws" in the prospectus.
In addition to the Homeownership Act, however, a number of legislative
proposals have been introduced at both the federal and state level that are
designed to discourage predatory lending practices. Some states have enacted, or
may enact, laws or regulations that prohibit inclusion of some provisions in
mortgage loans that have mortgage rates or origination costs in excess of
prescribed levels, and require that borrowers be given certain disclosures prior
to the consummation of such mortgage loans. In some cases, state law may impose
requirements and restrictions greater than those in the Homeownership Act. The
Originator's failure to comply with these laws could subject the trust, and
other assignees of the Mortgage Loans, to monetary penalties and could result in
the borrowers rescinding such Mortgage Loans against either the trust or
subsequent holders of the Mortgage Loans. Lawsuits have been brought in various
states making claims against assignees of High Cost Loans for violations of
state law. Named defendants in these cases include numerous participants within
the secondary mortgage market, including some securitization trusts.
See "Material Legal Aspects of the Loans--Homeownership Act and Similar
State Laws" in the prospectus.
THE OFFERED CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The Offered Certificates will not represent an interest in or
obligation of the Depositor, the Servicer, the Originator, the Seller, the
Trustee, the Underwriters or any of their respective affiliates. Neither the
Offered Certificates nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality, or by the Depositor, the
Servicer, the Trustee, the Underwriters or any of their respective affiliates.
Proceeds of the assets included in the trust and proceeds from the Net WAC Rate
Carryover Account will be the sole source of distributions on the Offered
Certificates, and there will be no recourse to the Depositor, the Servicer, the
Originator, the Seller, the Trustee, the Underwriters or any other entity in the
event that such proceeds are insufficient or otherwise unavailable to make all
distributions provided for under the Offered Certificates.
LACK OF LIQUIDITY
Greenwich Capital Markets, Inc. and WaMu Capital Corp. (the
"Underwriters") intend to make a secondary market in the Offered Certificates
but have no obligation to do so. There is no assurance that such a secondary
market will develop or, if it develops, that it will continue. Consequently, you
may not be able to sell your certificates readily or at prices that will enable
you to realize your desired yield. The market values of the certificates are
likely to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
NATURE OF THE MORTGAGE LOANS
The Mortgage Loans in the trust are loans that do not meet the
customary credit standards of Fannie Mae or Freddie Mac. As a result,
delinquencies and liquidation proceedings are more likely with these Mortgage
Loans than with mortgage loans that satisfy such credit standards. In the event
the Mortgage Loans do become delinquent or subject to liquidation, you may face
delays in receiving distributions and losses if the credit enhancement features
of the trust are insufficient to cover the delays and losses.
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THE CAP CONTRACT IS SUBJECT TO COUNTERPARTY RISK
The assets of the trust include the cap contract which will require the
counterparty thereunder to make certain payments for the benefit of the holders
of the Offered Certificates and Class B Certificates. To the extent that
distributions on such certificates depend in part on payments to be received by
the Trustee under the cap contract, the ability of the Trustee to make such
distributions on such certificates will be subject to the credit risk of the
counterparty to the cap contract. Although there is a mechanism in place to
facilitate replacement of the cap contract upon the default or credit impairment
of the counterparty, there can be no assurance that any such mechanism will
result in the ability of the Trustee to obtain suitable replacement cap
contract.
REDUCTION OR WITHDRAWAL OF RATINGS
Each rating agency rating the Offered Certificates may change or
withdraw its initial ratings at any time in the future if, in its judgment,
circumstances warrant a change. No rating agency is obligated to maintain the
ratings at their initial levels. If a rating agency reduces or withdraws its
rating on one or more classes of the Offered Certificates, the liquidity and
market value of the affected certificates is likely to be reduced.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS
The Offered Certificates are not suitable investments for any investor
that requires a regular or predictable schedule of monthly distributions or
distribution on any specific date. The Offered Certificates are complex
investments that should be considered only by investors who, either alone or
with their financial, tax and legal advisors, have the expertise to analyze the
prepayment, reinvestment, default and market risk, the tax consequences of an
investment and the interaction of these factors.
THE MORTGAGE POOL
The information set forth in the following paragraphs is based on
servicing records and representations about the Mortgage Loans that were made by
Centex Home Equity Company, LLC at the time it sold the Mortgage Loans. None of
the Underwriters, the Servicer or the Trustee or any of their respective
affiliates have made or will make any representation as to the accuracy or
completeness of such information.
The statistical information presented in this prospectus supplement
relates to the Mortgage Loans and related Mortgaged Properties as of the Cut-off
Date, as adjusted for scheduled principal payments due on or before the Cut-off
Date whether or not received. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other Mortgage
Loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such Mortgage Loans would materially alter the
characteristics of the Mortgage Loans as described in this prospectus
supplement. The Depositor believes that the information set forth in this
prospectus supplement with respect to the Mortgage Loans will be representative
of the characteristics of the Mortgage Pool as it will be constituted at the
time the Certificates are issued, although the range of Mortgage Rates and
maturities and certain other characteristics of the Mortgage Loans in the
Mortgage Pool may vary.
Unless otherwise noted, all statistical percentages or weighted
averages set forth in this prospectus supplement are measured as a percentage of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date
(the "Cut- off Date Principal Balance"). The "Principal Balance" of a Mortgage
Loan as of any date is equal to the principal balance of such Mortgage Loan at
its origination, less the sum of scheduled and unscheduled payments in respect
of principal made on such Mortgage Loan, whether received or advanced. The "Pool
Balance" as of any date is equal to the aggregate of the Principal Balances of
the Mortgage Loans the Mortgage Pool.
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GENERAL
CHEC Loan Trust 2004-1 (the "Trust") will consist of a pool of
residential mortgage loans (the "Mortgage Loans" or the "Mortgage Pool") which
will consist of fixed-rate and adjustable-rate, first and second lien, fully-
amortizing and balloon mortgage loans. The Mortgage Loans consist of
approximately 2,689 Mortgage Loans with a Cut-off Date Principal Balance of
approximately $309,395,802.
All of the Mortgage Loans will be secured by first or second mortgages
or deeds of trust or other similar security instruments (each, a "Mortgage").
The Mortgages create first or second liens on one- to four-family residential
properties consisting of attached or detached one- to four-family dwelling units
and individual condominium units (each, a "Mortgaged Property").
The Seller previously purchased the Mortgage Loans from the Originator
pursuant to the Master Mortgage Loan Purchase and Interim Servicing Agreement,
dated June 1, 2004 (the "Master Agreement"), among the Seller, the Originator
and Harwood Street Funding II, LLC. The Depositor will purchase the Mortgage
Loans and acquire the Seller's rights against the Originator under the Master
Agreement from the Seller pursuant to the Assignment and Recognition Agreement,
dated as of July 29, 2004 (the "Assignment Agreement"), among the Originator,
the Seller and the Depositor. Pursuant to the Pooling and Servicing Agreement,
dated as of July 1, 2004 (the "Pooling Agreement"), among the Depositor, the
Servicer and the Trustee, the Depositor will cause the Mortgage Loans and the
Depositor's rights under the Master Agreement and the Assignment Agreement to be
assigned to the Trustee for the benefit of the Certificateholders. See "The
Pooling Agreement" herein and "The Agreements" in the prospectus.
Each of the Mortgage Loans was selected from the Seller's portfolio of
mortgage loans. The Mortgage Loans were originated by the Originator or acquired
by the Originator in the secondary market in the ordinary course of its business
and were underwritten or re-underwritten by the Originator in accordance with
its underwriting standards as described under "Centex Home Equity Company,
LLC--Underwriting Standards" in this prospectus supplement.
Under the Master Agreement, certain representations and warranties
regarding the Mortgage Loans have been made by the Originator. Pursuant to the
Assignment Agreement, the Seller has assigned its rights with respect to the
Master Agreement, including remedies with respect to breaches of representations
and warranties, to the Depositor (who will further assign such rights to the
Trustee on behalf of the Trust) and made certain additional representations and
warranties regarding the Mortgage Loans. To the extent set forth under "The
Pooling Agreement--Assignment of the Mortgage Loans," the Trustee will enforce
the obligations of the Originator under the Master Agreement (as assigned to the
Trustee pursuant to the Assignment Agreement) or the Seller, to repurchase or
substitute a similar mortgage loan for any Mortgage Loan as to which there
exists uncured deficient documentation or an uncured breach of any such
representation or warranty, if such breach or deficiency materially and
adversely affects the Certificateholders' interests in such Mortgage Loan. The
Seller is selling the Mortgage Loans without recourse and will have no
obligation with respect to the Certificates in its capacity as Seller, other
than in connection with certain limited representations and warranties as
described above. The Originator will have no obligation with respect to the
Certificates in its capacity as Originator, other than in connection with
representations and warranties made by them under the Master Agreement and
assigned to the Trustee as described above.
The Mortgage Loans are subject to the "due-on-sale" provisions included
therein and some of the adjustable-rate Mortgage Loan may provide that the
Mortgage Loan is assumable by a creditworthy purchaser of the related Mortgaged
Property.
Each Mortgage Loan will accrue interest at the adjustable-rate or
fixed-rate calculated as specified under the terms of the related mortgage note
(each such rate, a "Mortgage Rate"). Approximately 64.21% of the Mortgage Loans
are adjustable-rate Mortgage Loans (the "Adjustable-Rate Mortgage Loans") and
approximately 35.79% of the Mortgage Loans are fixed-rate Mortgage Loans (the
"Fixed-Rate Mortgage Loans").
Each Fixed-Rate Mortgage Loan has a Mortgage Rate that is fixed for the
life of such Mortgage Loan.
S-17
Substantially all of the Adjustable-Rate Mortgage Loans accrue interest
at a Mortgage Rate that is adjustable following an initial period of two years
or three years following origination. Generally, the Adjustable-Rate Mortgage
Loans provide for semi-annual adjustment to the Mortgage Rate thereon and for
corresponding adjustments to the monthly payment amount due thereon, in each
case on each adjustment date applicable thereto (each such date, an "Adjustment
Date"); provided, that (i) the first adjustment of the rates for approximately
84.11% of the Adjustable-Rate Mortgage Loans (by aggregate Principal Balance of
the Adjustable-Rate Mortgage Loans as of the Cut-off Date), will not occur until
two years after the date of origination and (ii) the first adjustment of the
rates for approximately 15.24% of the Adjustable-Rate Mortgage Loans (by
aggregate Principal Balance of the Adjustable-Rate Mortgage Loans as of the
Cut-off Date), will not occur until three years after the date of origination
(each such Adjustable-Rate Mortgage Loan, a "Delayed First Adjustment Mortgage
Loan"). On each Adjustment Date for each Adjustable-Rate Mortgage Loan, the
Mortgage Rate thereon will be adjusted to equal the sum, rounded to the nearest
or next highest multiple of 0.125%, of Six-Month LIBOR (as defined below) and a
fixed percentage amount (the "Gross Margin"). The Mortgage Rate on any
Adjustable-Rate Mortgage Loan will not decrease on the first related Adjustment
Date, will not increase by more than a stated percentage (up to 3.000% per
annum, as specified in the related mortgage note) on the first related
Adjustment Date (the "Initial Periodic Rate Cap") and will not increase or
decrease by more than a stated percentage (2.000% per annum, as specified in the
related mortgage note) on any Adjustment Date thereafter (the "Periodic Rate
Cap"). The Adjustable-Rate Mortgage Loans have a weighted average Initial
Periodic Rate Cap of approximately 2.204% per annum and a weighted average
Periodic Rate Cap of approximately 1.039% per annum thereafter. Each Mortgage
Rate on each Adjustable-Rate Mortgage Loan will not exceed a specified maximum
Mortgage Rate over the life of such Mortgage Loan (the "Maximum Mortgage Rate")
or be less than a specified minimum Mortgage Rate over the life of such Mortgage
Loan (the "Minimum Mortgage Rate"). Effective with the first monthly payment due
on each Adjustable-Rate Mortgage Loan after each related Adjustment Date, the
monthly payment amount will be adjusted to an amount that will amortize fully
the outstanding Principal Balance of the related Adjustable-Rate Mortgage Loan
over its remaining term, and pay interest at the Mortgage Rate as so adjusted.
Due to the application of the Periodic Rate Caps and the Maximum Mortgage Rates,
the Mortgage Rate on each Adjustable-Rate Mortgage Loan, as adjusted on any
related Adjustment Date, may be less than the sum of the Index and the related
Gross Margin, rounded as described in this prospectus supplement. None of the
Adjustable-Rate Mortgage Loans will permit the related mortgagor to convert the
adjustable Mortgage Rate thereon to a fixed Mortgage Rate.
Approximately 62.82% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on partial prepayments and prepayments in full made within a
stated number of months that is between 12 and 60 months from the date of
origination of such Mortgage Loan. The amount of the prepayment charge is
provided in the related mortgage note and with respect to approximately 93.44%
of the Mortgage Loans that have a prepayment charge, the prepayment charge is
equal to six months' interest on any amounts prepaid in excess of 20% of the
original Principal Balance of the related Mortgage Loan in any 12 month period.
The holders of the Class P Certificates will be entitled to all prepayment
charges received on the Mortgage Loans, and such amounts will not be available
for distribution on the other classes of Certificates. Under certain
circumstances, as described in the Pooling Agreement, the Servicer may waive the
payment of any otherwise applicable prepayment charge. Investors should conduct
their own analysis of the effect, if any, that the prepayment charges, and
decisions by the Servicer with respect to the waiver thereof, may have on the
prepayment performance of the Mortgage Loans. As of July 1, 2003, the
Alternative Mortgage Parity Act of 1982 (the "Parity Act"), which regulates the
ability of some originators to impose prepayment charges, was amended. The
Depositor makes no representations as to the effect that the prepayment charges,
decisions by the Servicer with respect to the waiver thereof and the recent
amendment of the Parity Act, may have on the prepayment performance of the
Mortgage Loans. However, the Office of Thrift Supervision's ruling does not
retroactively affect loans originated before July 1, 2003. See "Material Legal
Aspects of Mortgage Loans--Prepayment Charge; Late Fees" in the prospectus.
THE INDEX. The index with respect to the adjustable-rate Mortgage Loans
is the average of interbank offered rates for six-month U.S. dollar deposits in
the London market based on quotations of major banks, and most recently
available as of a day specified in the related note as published by the Western
Edition of THE WALL STREET JOURNAL ("Six Month LIBOR" or the "Index"). If the
Index becomes unpublished or is otherwise unavailable, the Servicer will select
an alternative index which is based upon comparable information.
S-18
MORTGAGE LOAN STATISTICS
The following statistical information, unless otherwise specified, is
based upon percentages of the Principal Balances of the Mortgage Loans as of the
Cut-off Date.
Approximately 57.15% of the Mortgage Loans had loan-to-value ratios (or
combined loan-to-value ratios in the case of any second lien Mortgage Loans) at
origination in excess of 80.00%. No Mortgage Loan had a loan-to-value ratio (or
a combined loan-to-value ratio in the case of any second lien Mortgage Loans) at
origination in excess of 100.00%. The weighted average loan-to-value ratio (or
combined loan-to-value ratio in the case of any second lien Mortgage Loan) of
the Mortgage Loans at origination was approximately 80.98%. There can be no
assurance that the loan-to-value ratio (or combined loan-to-value ratio in the
case of any second lien Mortgage Loan) of any Mortgage Loan determined at any
time after origination is less than or equal to its original loan-to-value ratio
(or combined loan-to-value ratio in the case of any second lien Mortgage Loan).
Additionally, the Originator's determination of the value of a Mortgaged
Property used in the calculation of the original loan-to-value ratios (or
combined loan-to-value ratios in the case of any second lien Mortgage Loans) of
the Mortgage Loans may differ from the appraised value of such Mortgaged
Property or the actual value of such Mortgaged Property at origination. See
"Risk Factors--High Loan-to-Value Ratios Increase Risk of Loss."
The Mortgage Loans have scheduled payments due throughout the month
(each such date, the "Due Date").
The weighted average remaining term to maturity of the Mortgage Loans
was approximately 341 months as of the Cut-off Date. None of the Mortgage Loans
had a first Due Date prior to March 1, 2004 or after July 20, 2004, or has a
remaining term to maturity of less than 59 months or greater than 360 months as
of the Cut-off Date. The latest maturity date of any Mortgage Loan is June 20,
2034.
The average Principal Balance of the Mortgage Loans at origination was
approximately $115,291. The average Cut-off Date Principal Balance of the
Mortgage Loans was approximately $115,060. No Mortgage Loan had a Cut-off Date
Principal Balance of greater than approximately $781,561 or less than
approximately $4,963.
As of the Cut-off Date, the Mortgage Loans had Mortgage Rates of not
less than 4.250% per annum and not more than 14.750% per annum and the weighted
average Mortgage Rate of the Mortgage Loans was approximately 7.299% per annum.
As of the Cut-off Date, the Adjustable-Rate Mortgage Loans had Gross Margins
ranging from 2.750% per annum to 11.900% per annum, Minimum Mortgage Rates
ranging from 4.250% per annum to 11.550% per annum and Maximum Mortgage Rates
ranging from 9.250% per annum to 18.550% per annum. As of the Cut-off Date, the
weighted average Gross Margin of the Adjustable-Rate Mortgage Loans was
approximately 7.411% per annum, the weighted average Minimum Mortgage Rate of
the Adjustable-Rate Mortgage Loans was approximately 7.126% per annum and the
weighted average Maximum Mortgage Rate of the Adjustable-Rate Mortgage Loans was
approximately 14.101% per annum. The latest next Adjustment Date following the
Cut-off Date on any Adjustable-Rate Mortgage Loan occurs in June 2007 and the
weighted average time until the next Adjustment Date for all of the
Adjustable-Rate Mortgage Loans is approximately 24 months.
The Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
S-19
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------- ----- ---------------- ----------------
4,963 - 50,000.......... 561 $ 19,224,900.76 6.21%
50,001 -100,000.......... 938 68,314,136.23 22.08
100,001 -150,000.......... 529 64,989,240.84 21.01
150,001 -200,000.......... 280 48,347,042.24 15.63
200,001 -250,000.......... 183 40,875,419.86 13.21
250,001 -300,000.......... 89 24,573,755.24 7.94
300,001 -350,000.......... 49 15,762,443.67 5.09
350,001 -400,000.......... 28 10,565,742.00 3.41
400,001 -450,000.......... 10 4,199,410.07 1.36
450,001 -500,000.......... 8 3,776,483.97 1.22
500,001 -550,000.......... 3 1,605,537.02 0.52
550,001 -600,000.......... 5 2,894,748.53 0.94
600,001 -650,000.......... 1 624,362.78 0.20
650,001 -700,000.......... 2 1,394,174.10 0.45
700,001 -750,000.......... 2 1,466,843.27 0.47
750,001 -781,561.......... 1 781,561.34 0.25
----- --------------- ------
Total............. 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) The average Cut-off Date Principal Balance of the Mortgage Loans was
approximately $115,060.
CREDIT SCORES FOR THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ----- ---------------- ----------------
Not Available ............ 1 $ 156,259.55 0.05%
451 -500................. 5 349,339.43 0.11
501 -550................. 458 53,911,796.64 17.42
551 -600................. 834 101,772,546.98 32.89
601 -650................. 871 93,010,945.24 30.06
651 -700................. 382 42,853,516.72 13.85
701 -750................. 95 11,993,045.81 3.88
751 -800................. 38 4,800,965.59 1.55
Greater than 800........... 5 547,385.96 0.18
----- --------------- ------
Total................ 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) The weighted average credit score of the Mortgage Loans that had credit
scores was approximately 605.
S-20
ORIGINAL TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- --------- ---------------- ----------------
60........................ 1 $ 68,836.16 0.02%
61 -120................... 26 1,325,814.91 0.43
121 -180................... 258 14,403,489.97 4.66
181 -240................... 372 17,930,544.79 5.80
241 -300................... 12 1,240,317.29 0.40
301 -360................... 2,020 274,426,798.80 88.70
----- --------------- ------
Total.............. 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) The weighted average original term to maturity of the Mortgage Loans
was approximately 343 months.
REMAINING TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------- --------- ---------------- ----------------
59 - 60............... 1 $ 68,836.16 0.02%
61 -120............... 27 1,370,327.59 0.44
121 -180............... 259 14,509,991.63 4.69
181 -240............... 370 17,779,530.45 5.75
241 -300............... 12 1,240,317.29 0.40
301 -360............... 2,020 274,426,798.80 88.70
----- --------------- ------
Total.............. 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) The weighted average remaining term to maturity of the Mortgage Loans
was approximately 341 months.
PROPERTY TYPES OF THE MORTGAGE LOANS
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------- ----- ---------------- ----------------
Single Family ........... 2,298 $258,403,876.01 83.52%
PUD(1)................... 197 29,182,514.69 9.43
Condominium.............. 103 12,212,813.71 3.95
Townhouse................ 40 4,150,735.03 1.34
Two-to-Four- Family ..... 26 3,403,837.23 1.10
Manufactured Housing..... 25 2,042,025.25 0.66
----- --------------- ------
Total............. 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) PUD refers to a home or "unit" in a Planned Unit Development.
S-21
OCCUPANCY STATUS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------- ----- ---------------- ----------------
Primary................... 2,641 $304,861,903.12 98.53%
Investor.................. 30 2,303,570.83 0.74
Second Home............... 18 2,230,327.97 0.72
----- --------------- ------
Total........... 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) Occupancy as represented by the mortgagor at the time of origination.
PURPOSE OF THE MORTGAGE LOANS
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------- --------- ---------------- ----------------
Cash Out Refinance........ 1,886 $205,486,990.71 66.42%
Rate/Term Refinance....... 452 68,113,687.12 22.02
Purchase.................. 351 35,795,124.09 11.57
----- --------------- ------
Total.......... 2,689 $309,395,801.92 100.00%
===== =============== ======
S-22
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)(2)(#)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ---------------- ----------------
10.71 - 15.00................... 2 $ 124,884.65 0.04%
15.01 - 20.00................... 6 731,051.03 0.24
20.01 - 25.00................... 7 399,915.66 0.13
25.01 - 30.00................... 5 289,425.00 0.09
30.01 - 35.00................... 16 958,601.40 0.31
35.01 - 40.00................... 23 1,682,467.75 0.54
40.01 - 45.00................... 27 2,538,915.41 0.82
45.01 - 50.00................... 54 5,255,613.24 1.70
50.01 - 55.00................... 40 4,708,423.87 1.52
55.01 - 60.00................... 77 8,695,827.98 2.81
60.01 - 65.00................... 72 7,654,630.65 2.47
65.01 - 70.00................... 125 14,462,777.49 4.67
70.01 - 75.00................... 216 25,060,314.49 8.10
75.01 - 80.00................... 474 60,015,631.50 19.40
80.01 - 85.00................... 328 45,131,511.69 14.59
85.01 - 90.00................... 579 78,182,192.89 25.27
90.01 - 95.00................... 221 30,169,416.96 9.75
95.01 -100.00................... 417 23,334,200.26 7.54
----- --------------- ------
Total.................. 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) The weighted average original loan-to-value ratio of the Mortgage Loans
as of the Cut-off Date was approximately 80.98%.
(2) For a description of the determination of loan-to-value ratio by the
Originator see "Centex Home Equity Company, LLC--Underwriting
Standards" herein.
(3) References to loan-to-value ratios are references to combined
loan-to-value ratios with respect to second lien Mortgage Loans.
S-23
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
RELATED TO THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------- --------- ---------------- ----------------
Arizona................... 66 $ 6,272,495.48 2.03%
Arkansas.................. 11 869,015.52 0.28
California................ 313 59,115,690.34 19.11
Colorado.................. 65 10,029,480.52 3.24
Connecticut............... 30 4,239,639.47 1.37
Delaware.................. 13 1,700,245.54 0.55
Florida................... 179 23,709,309.70 7.66
Georgia................... 109 11,610,034.20 3.75
Idaho..................... 15 1,300,907.76 0.42
Illinois.................. 32 2,566,750.02 0.83
Indiana................... 83 7,337,810.92 2.37
Iowa...................... 40 2,819,694.31 0.91
Kansas.................... 21 2,094,673.68 0.68
Kentucky.................. 33 2,828,251.00 0.91
Louisiana................. 69 5,817,376.09 1.88
Maine..................... 13 1,469,561.05 0.47
Maryland.................. 54 7,547,266.28 2.44
Massachusetts............. 46 7,774,264.02 2.51
Michigan.................. 77 7,872,473.11 2.54
Minnesota................. 22 2,843,163.63 0.92
Mississippi............... 18 1,447,223.75 0.47
Missouri.................. 44 3,806,972.58 1.23
Montana................... 8 665,361.96 0.22
Nebraska.................. 8 532,703.49 0.17
Nevada.................... 46 5,986,476.99 1.93
New Hampshire............. 24 2,903,046.16 0.94
New Jersey................ 60 7,811,821.01 2.52
New Mexico................ 25 2,055,804.19 0.66
New York.................. 84 11,438,788.62 3.70
North Carolina............ 79 7,867,688.76 2.54
North Dakota.............. 1 76,427.36 0.02
Ohio...................... 115 10,772,105.51 3.48
Oklahoma.................. 34 2,337,151.95 0.76
Oregon.................... 18 2,356,248.08 0.76
Pennsylvania.............. 108 11,057,513.80 3.57
Rhode Island.............. 11 1,260,000.65 0.41
South Carolina............ 37 2,741,688.80 0.89
South Dakota.............. 3 130,015.77 0.04
Tennessee................. 65 6,177,546.67 2.00
Texas..................... 357 28,966,881.32 9.36
Utah...................... 17 1,992,331.50 0.64
Vermont................... 6 527,998.22 0.17
Virginia.................. 82 10,149,308.00 3.28
Washington................ 83 10,059,207.39 3.25
West Virginia............. 14 1,342,868.47 0.43
Wisconsin................. 46 4,725,874.31 1.53
Wyoming................... 5 388,643.97 0.13
----- --------------- ------
Total............. 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) The greatest ZIP Code geographic concentration of Mortgage Loans was
approximately 0.44% in the 92867 ZIP Code.
S-24
DOCUMENTATION LEVELS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ---------------- ----------------
Full Documentation............ 2,376 $265,083,843.45 85.68%
No Income Verification........ 227 31,016,732.53 10.02
Limited Income Verification... 86 13,295,225.94 4.30
----- --------------- ------
Total.............. 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) For a description of each Documentation Level, see "Centex Home Equity
Company, LLC--Underwriting Standards" herein.
CURRENT MORTGAGE RATES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
CURRENT MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------- --------- ---------------- ----------------
4.250 - 4.500............ 5 $ 1,426,352.04 0.46%
4.501 - 5.000............ 33 6,634,138.72 2.14
5.001 - 5.500............ 114 21,826,240.51 7.05
5.501 - 6.000............ 268 43,579,120.24 14.09
6.001 - 6.500............ 265 41,681,168.21 13.47
6.501 - 7.000............ 364 49,300,587.71 15.93
7.000 - 7.500............ 266 33,391,079.34 10.79
7.501 - 8.000............ 289 33,733,159.93 10.90
8.001 - 8.500............ 167 18,312,623.39 5.92
8.501 - 9.000............ 225 20,861,057.39 6.74
9.001 - 9.500............ 118 8,286,198.82 2.68
9.501 -10.000............ 192 12,042,336.35 3.89
10.001 -10.500............ 77 3,943,913.19 1.27
10.501 -11.000............ 117 6,136,332.28 1.98
11.001 -11.500............ 53 2,609,302.56 0.84
11.501 -12.000............ 75 3,181,127.70 1.03
12.001 -12.500............ 28 1,259,316.80 0.41
12.501 -13.000............ 21 791,860.57 0.26
13.001 -13.500............ 6 205,883.74 0.07
13.501 -14.000............ 4 138,122.57 0.04
14.001 -14.500............ 1 35,893.71 0.01
14.501 -14.750............ 1 19,986.15 0.01
----- --------------- ------
Total............. 2,689 $309,395,801.92 100.00%
===== =============== ======
- -------------------
(1) The weighted average current Mortgage Rate of the Mortgage Loans as of
the Cut-off Date was approximately 7.299% per annum.
S-25
GROSS MARGINS OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------- --------- ---------------- ----------------
2.750 - 3.000............ 1 $ 432,403.12 0.22%
4.501 - 5.000............ 4 993,948.92 0.50
5.001 - 5.500............ 48 9,309,179.58 4.69
5.501 - 6.000............ 91 16,076,806.60 8.09
6.001 - 6.500............ 164 28,847,454.15 14.52
6.501 - 7.000............ 154 25,684,675.79 12.93
7.001 - 7.500............ 229 33,844,806.32 17.04
7.501 - 8.000............ 193 26,544,545.87 13.36
8.001 - 8.500............ 151 19,924,042.67 10.03
8.501 - 9.000............ 101 12,278,131.80 6.18
9.001 - 9.500............ 100 11,538,650.46 5.81
9.501 -10.000............ 52 5,143,169.74 2.59
10.001 -10.500............ 42 4,292,073.53 2.16
10.501 -11.000............ 16 1,803,252.29 0.91
11.001 -11.500............ 17 1,193,910.66 0.60
11.501 -11.900............ 7 747,710.40 0.38
----- --------------- ------
Total............ 1,370 $198,654,761.90 100.00%
===== =============== ======
- -------------------
(1) The weighted average Gross Margin of the Adjustable-Rate Mortgage Loans
as of the Cut-off Date was approximately 7.411% per annum.
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ----- ---------------- ----------------
October 2004............... 2 $ 295,039.96 0.15%
November 2004.............. 4 545,218.12 0.27
December 2004.............. 3 449,460.48 0.23
March 2006................. 123 16,257,993.18 8.18
April 2006................. 361 52,857,138.48 26.61
May 2006................... 511 75,250,124.26 37.88
June 2006.................. 168 22,730,455.51 11.44
March 2007................. 16 2,783,084.96 1.40
April 2007................. 78 11,021,461.80 5.55
May 2007................... 71 11,308,064.39 5.69
June 2007.................. 33 5,156,720.76 2.60
----- --------------- ------
Total............... 1,370 $198,654,761.90 100.00%
===== =============== ======
- -------------------
(1) The weighted average time until the next Adjustment Date for the
Adjustable-Rate Mortgage Loans as of the Cut-off Date was approximately 24
months.
S-26
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------- --------- ---------------- ----------------
9.250 -10.000........... 1 $ 432,403.12 0.22%
11.001 -12.000........... 37 7,628,087.64 3.84
12.001 -13.000........... 215 38,077,034.96 19.17
13.001 -14.000........... 388 61,879,838.85 31.15
14.001 -15.000........... 358 49,024,393.73 24.68
15.001 -16.000........... 221 26,633,839.64 13.41
16.001 -17.000........... 106 10,976,603.00 5.53
17.001 -18.000........... 34 3,080,059.94 1.55
18.001 -18.550........... 10 922,501.02 0.46
----- --------------- ------
Total........... 1,370 $198,654,761.90 100.00%
===== =============== ======
- -------------------
(1) The weighted average Maximum Mortgage Rate of the Adjustable-Rate Mortgage
Loans as of the Cut-off Date was approximately 14.101% per annum.
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------- --------- ---------------- ----------------
4.250 - 5.000........... 38 $ 8,060,490.76 4.06%
5.001 - 6.000........... 212 37,468,710.52 18.86
6.001 - 7.000........... 381 60,990,292.45 30.70
7.001 - 8.000........... 356 49,129,929.65 24.73
8.001 - 9.000........... 228 27,475,800.32 13.83
9.001 -10.000........... 111 11,526,977.24 5.80
10.001 -11.000........... 34 3,080,059.94 1.55
11.001 -11.550........... 10 922,501.02 0.46
----- --------------- ------
Total............ 1,370 $198,654,761.90 100.00%
===== =============== ======
- -------------------
(1) The weighted average Minimum Mortgage Rate of the Adjustable-Rate Mortgage
Loans as of the Cut-off Date was approximately 7.126% per annum.
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INITIAL PERIODIC RATE CAPS OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
1.000........................ 10 $ 1,385,540.51 0.70%
2.000........................ 1,087 155,357,114.96 78.20
3.000........................ 273 41,912,106.43 21.10
----- --------------- ------
Total.............. 1,370 $198,654,761.90 100.00%
===== =============== ======
- -------------------
(1) Relates solely to initial rate adjustments.
SUBSEQUENT PERIODIC RATE CAPS OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------- -------- ---------------- ----------------
1.000..................... 1,274 $183,497,152.85 92.37%
1.500..................... 94 14,629,383.98 7.36
2.000..................... 2 528,225.07 0.27
----- --------------- ------
Total........... 1,370 $198,654,761.90 100.00%
===== =============== ======
- -------------------
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
RISK CATEGORIES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT GRADE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------ ----- ---------------- ----------------
A....................... 2,352 $272,633,167.90 88.12%
B....................... 108 11,681,640.03 3.78
C....................... 218 24,010,906.77 7.76
D....................... 11 1,070,087.22 0.35
----- --------------- ------
Total......... 2,689 $309,395,801.92 100.00%
===== =============== ======
- --------------------
(1) For a description of each risk category, see "The Originator--
Underwriting Standards" herein.
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CENTEX HOME EQUITY COMPANY, LLC
GENERAL
Centex Home Equity Company, LLC (the "Originator" and the "Servicer"),
a Delaware limited liability company, is a sub-prime mortgage lender formed in
1994 that engages in originating primarily non-conforming mortgage loans,
through five major origination sources. The Originator was originally named Nova
Credit Corporation and was headquartered in Denver, Colorado. In the first
calendar quarter of 1997, the Originator's operations were moved to Dallas,
Texas and the Originator underwent a reorganization and the hiring of a new
management team. In April 1997, the Originator's name was changed to Centex
Credit Corporation. In September of 2001, the Originator merged into its
wholly-owned subsidiary, Centex Home Equity Company, LLC, a Delaware limited
liability company, with Centex Home Equity Company, LLC becoming the surviving
entity. The Originator is a wholly-owned subsidiary of Centex Financial
Services, Inc., a financial services subsidiary of Centex Corporation,
headquartered in Dallas, Texas. Centex Corporation is a publicly traded,
diversified company with a market capitalization of approximately $5.7 billion
and is primarily engaged in the home building, financial services and
construction services industries. The Originator is also affiliated with CTX
Mortgage Company, LLC, a Delaware limited liability company, which originates
home mortgage loans conforming to the guidelines of the Fannie Mae and the
Freddie Mac. Since inception, the Originator has focused on lending to
individuals who have substantial equity in their homes but have impaired or
limited credit histories. The Originator's mortgage loans to these borrowers are
made for many purposes such as debt consolidation, refinancing, home improvement
and educational expenses. Substantially all of the Originator's mortgage loans
are secured by first or second mortgage liens on one- to four-family residences,
and have amortization schedules ranging from 5 to 30 years.
The Originator is currently licensed to do business in 47 states plus
the District of Columbia and employs approximately 2,210 people located in 144
offices in 37 states. The Originator originates mortgage loans through its
retail branch network of 78 branch offices located in 31 states. In addition,
the Originator originates mortgage loans through a broker referral network from
five division offices with a total of 20 regions. A third production source for
the Originator is referral of mortgage loans from its affiliate conforming
mortgage company, CTX Mortgage Company, LLC. A fourth source of origination of
mortgage loans for the Originator is purchases of loans from wholesale sources
approved by the Originator. The final source of origination of mortgage loans is
the Originator's direct sales unit which sources loans through telemarketing and
direct mail efforts. The Originator's strategy is to utilize these origination
channels to generate growth in the volume of the mortgage loans originated while
diversifying sources of the mortgage loans and maintaining emphasis on its
underwriting standards.
The Originator has centralized its underwriting, servicing and quality
control functions in its Dallas offices. Those offices include executive offices
located at 2828 N. Harwood Street, Dallas, Texas, 75201. Its telephone number is
(214) 758-7000. Servicing operations are located at 350 Highland Drive,
Lewisville, Texas, 75067.
UNDERWRITING GUIDELINES APPLICABLE TO THE MORTGAGE LOANS
THE PRE-UNDERWRITING PROCESS. The Originator's mortgage loan
application process is conducted by the Originator's branch officers and
approved mortgage brokers who compile information necessary for the Originator's
underwriting department to evaluate the mortgage loan. The approval process is
generally coordinated over the telephone with applications and credit reports
obtained by branch processors or brokers and usually sent by facsimile
transmission to the processing department at one of the Originator's offices.
Branch personnel communicate with the Originator's centralized underwriting
staff, located in Dallas, Texas and Tempe, Arizona, which consists of
approximately 38 underwriters. The Originator also employs 20 other underwriters
in five divisional offices, which have loan approval authority on a limited
basis. Branch operation personnel review the applicant's credit history, based
on the information contained in the application as well as reports available
from credit reporting bureaus, to see if the credit history is acceptable given
the Originator's underwriting guidelines. A credit report from one approved
repository is required for pre-approval and one preferred credit bureau report
or two credit reports are required prior to underwriting review. These credit
reports are the primary means utilized to verify each borrower's mortgage and
other debt payment histories. Based on this review, the proposed terms of the
mortgage loan are then communicated to the branch officer or broker responsible
for the application who in turn discusses the proposal with the mortgage loan
applicant. If the applicant
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accepts the proposed terms, a branch officer or broker will gather additional
information necessary for the underwriting, closing and funding of the loan.
THE STANDARD NON-CONFORMING PROGRAM. The Mortgage Loans were originated
under, or, if acquired by the Originator from wholesale sources, were
re-underwritten to comply with, the Originator's Standard Non-Conforming
Program. The Standard Non-Conforming Program is applicable to residential loans
which, for credit reasons, do not conform to "traditional lenders" underwriting
guidelines comparable to those employed by savings and loans and commercial
banks. The Originator began underwriting mortgage loans in accordance with the
Standard Non-Conforming Program in May 1997.
The Originator's underwriting standards under the Standard
Non-Conforming Program are primarily intended to assess the creditworthiness of
the mortgagor and the value of the mortgaged property and to evaluate the
adequacy of the property as collateral for the mortgage loan. While the
Originator's primary consideration in underwriting a mortgage loan is the
borrower's employment stability and debt-to-income ratio, the condition and
value of the mortgaged property relative to the amount of the mortgage loan is
another critical factor. In addition, it also considers, among other things, a
mortgagor's credit history and repayment ability, as well as the type and use of
the mortgaged property.
The Originator currently employs approximately 58 underwriters and has
its underwriting functions primarily centralized in its Dallas, Texas
headquarters. The Originator does not delegate underwriting authority to any
broker or correspondent lender. The Originator's underwriting department
functions independently of its mortgage origination departments. Underwriters
are compensated on a salary basis, and not through commissions.
The Originator's policy is that every mortgage loan is reviewed and
approved by an underwriter with assigned approval authorities. Mortgage loans
exceeding those authorities require a second approval, generally from a manager
of underwriting or an underwriting supervisor.
The Originator has established classifications with respect to the
credit profile of the applicant, and each loan is placed into one of seven
ratings "A+" through "D". Terms of loans made by the Originator as well as
maximum loan- to-value ratios and debt-to-income ratios vary depending on the
classification of the applicant. Mortgage loan applicants with less favorable
credit ratings are generally offered mortgage loans with higher interest rates
and lower loan-to-value ratios than applicants with more favorable credit
ratings.
The Mortgage Loans underwritten under the Originator's Standard
Non-Conforming Program are Fixed-Rate Mortgage Loans and Adjustable-Rate
Mortgage Loans. The Fixed-Rate Mortgage Loans originated by the Originator have
amortization schedules ranging from 5 to 30 years, and generally require equal
monthly payments that are due as of a scheduled day of each month which is fixed
at the time of origination. Balloon loans originated by the Originator generally
provide for scheduled amortization over 30 years, with a maturity date and a
balloon payment at the end of the 15th year. The Originator originates
adjustable rate mortgage (ARM) loan products called six-month ARMs, 2/28 ARMs,
3/27 ARMs or 5/25 ARMs, each of which bear interest at rates which adjust based
on the six-month (or, in the case of the 5/25 ARMs, one-year) LIBOR, with the
initial rate adjustment date being either six months, 24 months, 36 months or 60
months after the date of origination of the loan, respectively. The six-month
ARMs amortize over 15 to 30 years, adjust every six months and allow for a
maximum periodic rate adjustment of 2.00%. The maximum adjustment over the life
of a six-month ARM is capped at 7.00% above the initial interest rate of the
loan and the minimum interest rate is generally equal to the initial interest
rate. The 2/28 and the 3/27 ARMs amortize over 30 years, have an initial
interest rate adjustment date which is 24 months or 36 months, respectively,
after the date of origination and allow for a maximum rate adjustment on the
initial interest rate adjustment date of 3.00%. After the initial rate
adjustment date, the 2/28 ARMs and the 3/27 ARMs adjust every six months, allow
for a maximum periodic rate adjustment of 1.50%, have a lifetime cap on interest
rate adjustments of 7.00% above the initial interest rate of the loan and allow
for a minimum rate generally equal to the initial interest rate of the loan. The
5/25 ARMs amortize over 30 years, have an initial interest rate adjustment date
which is 60 months after the date of origination and allow for a maximum rate
adjustment on the initial interest rate adjustment date of 2.00%. After the
initial rate adjustment date, the 5/25 ARMs adjust every 12 months, allow for a
maximum periodic rate adjustment of 2.00%, have a lifetime cap on interest rate
adjustments of 6.00% above the initial interest rate of the loan and allow for a
minimum rate generally equal to the initial interest rate of the loan. The
Originator does not currently originate ARMs with a balloon feature.
S-30
The principal amounts of the mortgage loans originated by the
Originator generally range from a minimum of $5,000 to a maximum of $750,000.
The collateral securing loans originated by the Originator are generally one- to
four- family residences, including condominiums, townhomes and manufactured
housing treated as real property under applicable state law. These properties
may or may not be occupied by the owner. It is the Originator's policy not to
accept commercial properties, mixed-use properties or unimproved land as
collateral. Rural property requires a 5% reduction in loan-to-value ratio.
Second mortgages require a 5% reduction in loan-to-value ratio on owner occupied
property. The Originator generally does not originate second lien mortgage loans
where any senior mortgage lien allows for open-end advances or negative
amortization, is a private party mortgage or has shared appreciation provisions.
The Originator has established a "piggyback" program under which the
Originator may originate a first and second lien mortgage loan with the same
borrower and secured by the same property simultaneously. Under the "piggyback"
program, the loan-to-value ratio of the first mortgage must meet standard "A+",
"A-1" or "A-2" product guidelines. The second mortgage is allowed a combined
loan-to-value ratio of up to 100%. Under the program, second mortgages must
meet, in addition to standard program requirements, certain other requirements,
including a maximum loan size of $100,000, a maximum loan term of 240 months,
collateral consisting of a single family owner occupied property, "Full
Documentation" from the borrower as described below and an "A-2" or better
credit standard.
The Mortgage Loans underwritten under the Standard Non-Conforming
Program are underwritten pursuant to the "Full Documentation" residential loan
program, the "Limited Documentation" residential loan program or the "Stated
Income" residential loan program. Under each of these programs, the Originator
reviews the mortgage loan applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar documentation,
reviews the credit history of the applicant, calculates the debt-to-income ratio
to determine the applicant's ability to repay the mortgage loan, reviews the
type and use of the property being financed and reviews the property for
compliance with the Originator's standards. In determining an applicant's
ability to repay a six-month ARM, the Originator uses a qualifying rate equal to
six-month LIBOR plus a margin. In determining an applicant's ability to repay a
2/28 ARM, a 3/27 ARM or a 5/25 ARM, the Originator uses a qualifying rate equal
to six-month LIBOR plus a margin, minus a percentage amount up to 2.50%. It is
the policy of the Originator for its underwriting process to consist of a
thorough credit review and a thorough appraisal review on each mortgage loan by
its underwriting department. In addition, the Originator performs a separate
appraisal review by the Originator's appraisal review department on mortgage
loans considered to be higher risk loans. These include Limited Documentation
Program loans, Stated Income Program loans, loans secured by multi-unit
properties, loans secured by non-owner occupied collateral, loans with higher
loan-to-value ratios, loans not appraised by a seller preferred appraisal
management company and loans involving non- approved appraisers. Finally, the
Originator performs a full compliance review to ensure that all documents have
been properly prepared, all applicable disclosures given in a timely fashion and
all federal and state regulations properly complied with. Appraisals are
performed by third party, independent, fee-based, state-licensed appraisers
generally approved by the Originator's staff appraiser and generally conforming
to current Fannie Mae and/or Freddie Mac secondary market requirements for
residential property appraisals. Each appraisal includes, among other things, an
inspection of the interior and exterior of the subject property and data from
sales within the same general location as the subject property where available.
The Originator's underwriting criteria require it to determine the
income of each borrower and the source of funds (if applicable). Under the Full
Documentation Program, it is the policy of the Originator that mortgage loans to
borrowers who are salaried employees be supported by current employment
information in addition to employment history. This information for salaried
borrowers is verified based on any of the following: written confirmation from
employers, one or more pay-stubs, recent W-2 tax forms or recent tax returns. In
addition, a telephone confirmation of employment is made. Under the Limited
Documentation Program, self-employed borrowers are qualified based upon monthly
income stated on the mortgage loan application. Current tax return or six to
twelve months of current bank statements and a copy of business license are
obtained to verify existence of business and acceptable cash flow. Under the
Stated Income Program, borrowers are qualified based upon monthly income as
stated on the mortgage loan application and telephone confirmation of
employment. Self-employed borrowers under the Stated Income Program are required
to submit a business license, current bank statements and verification with
directory assistance to ensure existence of the business.
S-31
Verification of the applicant's source of funds (if any) is generally
required under purchase money programs in the form of a standard verification of
deposit, current bank statement or other acceptable documentation. Twelve months
of mortgage payments or rental history must be verified by lender or landlord.
If appropriate compensating factors exist, the Originator may waive certain
documentation requirements for individual borrowers. All documentation should be
no more than 60 days old at underwriting and no more than 90 days old at the
time of the funding of the related loan. Upon completion of a mortgage loan's
underwriting and processing, the closing of the loan is scheduled with a closing
attorney or agent approved by the Originator. The closing attorney or agent is
responsible for completing the loan closing transaction in accordance with
applicable law and the Originator's operating procedures. Title insurance that
insures the Originator's interest as mortgagee and evidence of adequate
homeowner's insurance naming the Originator and its assignees as an additional
insured party are required on all loans.
MORTGAGE LIFE INSURANCE. The Originator is currently underwriting some
of its mortgage loans with mortgage life insurance that is underwritten by an
unrelated third party. This insurance provides for the payment of indebtedness
upon the death of the insured. This insurance may be underwritten as either
joint insurance (covering both borrower and co-borrower) or single insurance
(covering the primary borrower only). The maximum coverage amount of the
mortgage life insurance is $100,000 and is based upon a net payoff basis. The
term of the coverage is generally limited to five years. Borrowers pay for the
mortgage life insurance by payment of monthly premiums that are not financed as
part of the mortgage loan balance. The insured can voluntarily cancel the policy
at any time and the policy can be cancelled by the insurer if three monthly
premiums become delinquent.
INVOLUNTARY UNEMPLOYMENT INSURANCE. The Originator is currently
underwriting some of its mortgage loans with involuntary unemployment insurance
that is underwritten by an unrelated third party. This insurance provides for
the payment of monthly loan payments upon the insured's loss of income due to
(i) individual or mass layoff, (ii) general strike, unionized labor dispute or
lockout or (iii) termination by an employer, unless such termination occurred
because of willful misconduct. The insurance covers the primary borrower only.
The maximum coverage amount of the involuntary unemployment insurance is $1,000
per month. The insurance payments are generally limited to six months. Borrowers
pay for the involuntary unemployment insurance by payment of monthly premiums
that are not financed as part of the mortgage loan balance. The insured can
cancel the policy at any time, and the insurer can cancel the policy if three
monthly premiums become delinquent.
UNDERWRITING CRITERIA OF THE ORIGINATOR
"A+" RISK. Under the "A+" risk category, the prospective borrower must
have repaid installment or revolving consumer debt according to its terms with
no 30-day late payments within the last 12 months and within the prior 12 month
period no 30-day late payments are permitted on an existing mortgage. No
collection accounts, unpaid charge- offs, judgments or a derogatory public
record is permitted within the past two years (except medical collections under
$500). No bankruptcy or foreclosure may have occurred during the preceding four
years commencing from the date of discharge or the date the foreclosure was
filed. No state or federal tax liens (paid or unpaid) are permitted in the last
year. No delinquent property taxes over one year are permitted. A maximum
loan-to-value ratio of 90% for mortgage loans originated under the Full
Documentation Program (85% for the Limited Documentation Program or 80% for the
Stated Income Program) is permitted for a mortgage loan of less than $750,000 on
an owner-occupied property. A maximum loan-to-value ratio of 85% for a mortgage
loan originated under the Full Documentation Program (75% for the Limited
Documentation Program or 70% for the Stated Income Program) is permitted for a
mortgage loan of less than $500,000 on non-owner occupied property. The maximum
debt service-to-income ratio is 45%. The prospective borrower must also have a
minimum risk (FICO) score of 580.
"A-1" RISK. Under the "A-1" risk category, the prospective borrower
must have generally repaid installment or revolving debt according to its terms
with no 60-day late payments within the last 12 months. A maximum of one 30- day
late payment is acceptable in the last 12 months on an existing mortgage.
Consecutive 30-day delinquencies may be considered as a single late. This is
limited to 30-days late only. Minor derogatory items are allowed as to non-
mortgage credit. No unpaid collection accounts, charge-offs or judgments over
$500 within the last two years are allowed. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding three years. A
maximum loan-to-value ratio of up to 90% (85% for the Limited Documentation
Program or 80% for the Stated Income Program) is permitted for a mortgage loan
on a one-to-four family owner-occupied property. A maximum loan- to-value
S-32
ratio of up to 85% (75% for the Limited Documentation Program or 70% for the
Stated Income Program) is permitted for a mortgage loan on a non-owner occupied
property. The debt service-to-income ratio generally is 50% or less based on the
relevant qualifying rate for the mortgage loan. The maximum loan amount is
$750,000 for a single family property and $500,000 for a two-to-four family
property under the Full Documentation Program. The maximum loan amount is
$350,000 for a mortgage loan on a one-to-four family property under the Limited
Documentation Program or Stated Income Program. Exceptions to the maximum loan
amount for a single-family, owner occupied property are considered by the
Originator on a limited basis. The prospective borrower must also have a minimum
risk (FICO) score of 560.
"A-2" RISK. Under the "A-2" risk category, the prospective borrower
must have generally repaid installment or revolving debt according to its terms
with no 90-day late payments within the last 12 months. A maximum of three
30-day late payments and no 60-day late payments within the last 12 months is
acceptable on an existing mortgage loan. Minor derogatory items are allowed as
to non-mortgage credit. No unpaid collection accounts, charge-offs or judgments
over $1,000 within the last two years are allowed. No bankruptcy or notice of
default filings by the borrower may have occurred during the preceding three
years. A maximum loan-to-value ratio of up to 90% (85% for the Limited
Documentation Program or 80% for the Stated Income Program) is permitted for a
mortgage loan on a one-to-four family owner occupied property. A maximum
loan-to-value ratio of up to 80% (75% for the Limited Documentation Program or
65% for the Stated Income Program) is permitted for a mortgage loan on a
non-owner occupied property. The debt service-to-income ratio generally is 50%
or less based on the relevant qualifying rate of the mortgage loan. The maximum
loan amount is $750,000 for a single family property and $500,000 for a
two-to-four family property under the Full Documentation Program. The maximum
loan amount is $350,000 for a mortgage loan on a one-to-four family property
under the Limited Documentation Program or Stated Income Program. Exceptions to
the maximum loan amount for a single-family, owner occupied property are
considered by the Originator on a limited basis. The prospective borrower must
also have a minimum risk (FICO) score of 525.
"B" RISK. Under the "B" risk category, the prospective borrower must
have generally repaid consumer debt according to its terms with no 120-day late
payments within the last 12 months. No 60-day late payments within the last 12
months are allowed on an existing mortgage loan on the subject property. As to
non-mortgage credit, some prior defaults may have occurred. Isolated and
insignificant collections and/or charge-offs and judgments within the last 24
months less than $2,500 are permitted and are not required to be paid from the
proceeds of the mortgage loan. No bankruptcy or foreclosure by the borrower may
have occurred during the preceding 24 months. A maximum loan-to- value ratio of
85% (80% for the Limited Documentation Program or 75% for the Stated Income
Program) is permitted for a mortgage loan on a one-to-four family owner occupied
property. A maximum loan-to-value ratio of 75% (70% for the Limited
Documentation Program or 65% for the Stated Income Program) is permitted for a
mortgage loan on a non- owner occupied property. The debt service-to-income
ratio generally is 50% or less based on the relevant qualifying rate for the
mortgage loan. The maximum loan amount is $500,000 for a one-to-four family
property under the Full Documentation Program. The maximum loan amount is
$350,000 for mortgage loans originated under the Limited Documentation Program
or Stated Income Program. The prospective borrower must also have a minimum risk
(FICO) score of 525.
"C-1" RISK. Under the "C-1" risk category, the prospective borrower may
have experienced significant credit problems in the past. Installment debt may
have been up to 120 days delinquent within the last twelve months. A maximum of
one 60-day late payment within the last 12 months is acceptable on an existing
mortgage loan. The existing home equity obligation can be up to 60 days past due
at the funding of the loan. As to non-mortgage credit, significant prior
defaults may have occurred. There may be open collections or charge-offs within
the last 24 months up to $5,000. However, collection accounts, unpaid
charge-offs or judgments are not required to be paid from the proceeds of the
mortgage loan. No bankruptcy or notice of default filings by the borrower may
have occurred during the preceding 12 months. A maximum loan-to-value ratio of
80% (75% for the Limited Documentation Program or 70% for the Stated Income
Program) is permitted for a mortgage loan on a one-to-four family owner-occupied
property. A maximum loan- to-value ratio of 70% (65% for the Limited
Documentation Program) is permitted for a mortgage loan on a non-owner- occupied
property. The debt service-to-income ratio is generally 50% or less based on the
relevant qualifying rate for the mortgage loan. The maximum loan amount is
$350,000 for a mortgage loan on a one-to-four family owner-occupied or non-owner
occupied property. The maximum loan amount is $250,000 on the Limited
Documentation Program. The prospective borrower must also have a minimum risk
(FICO) score of 500.
S-33
"C-2" RISK. Under the "C-2" risk category, the prospective borrower may
have experienced significant credit problems in the past. Installment debt may
have been up to 120 days delinquent within the last twelve months. A maximum of
two 60-day late payments or one 90-day late payment within 12 months is
acceptable on an existing mortgage loan on the subject property. The existing
home equity obligation can be up to 90 days past due at the funding of the loan.
As to non-mortgage credit, significant prior defaults may have occurred. There
may be open collections or charge-offs during the past 24 months not to exceed
$5,000 and collection accounts, unpaid charge-offs or judgments are not required
to be paid from the proceeds of the mortgage loan. No bankruptcy or notice of
default filings by the borrower may have occurred during the preceding 12
months. A maximum loan-to-value ratio of 75% is permitted for a mortgage loan on
a one-to-four family owner-occupied property. A maximum loan-to-value ratio of
65% is permitted for a mortgage loan on a non-owner-occupied property. The debt
service-to-income ratio is generally 50% or less based on the relevant
qualifying rate for the mortgage loan. The maximum loan amount is $350,000. The
prospective borrower must also have a minimum risk (FICO) score of 500.
"D" RISK. Under the "D" risk category, the prospective borrower may
have experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a disregard for timely payment or credit standing.
With respect to an existing mortgage loan on the subject property, the mortgage
loan may be no more than one time 120 days late and may be in foreclosure
proceedings. The existing mortgage loan is not required to be current at the
time the application is submitted. The borrower may have open collections,
charge-offs and judgments, which are generally paid through the loan proceeds if
the amount exceeds $5,000. Bankruptcy or notice of default filings by the
borrower may be present at the time of the loan. A maximum loan-to-value ratio
of 70% is permitted for a mortgage loan on a one-to-four family owner-occupied
property. A maximum loan to value ratio of 50% is permitted for a mortgage loan
on non-owner occupied one-to-four family property. The maximum loan amount is
$350,000. The debt service-to-income ratio generally is 50% or less based on the
relevant qualifying rate for the mortgage loan. The prospective borrower must
also have a minimum risk (FICO) score of 500.
In addition to the above credit risk criteria, the Originator has
established a "Revolving Override Program", a "Reduced Lookback Program" and an
"Express Grade Program". Under the "Revolving Override Program", the Originator
does not consider revolving credit history on "A" credit grade loans, provided
the borrower's risk (FICO) score is 620 or greater on "A+" credit, 600 or
greater on "A-1" credit and 580 or greater on "A-2" credit. All other criteria
above apply.
Under the "Reduced Lookback Program", the Originator may reduce the
lookback period on collections, charge- offs, judgments and tax liens from 2
years to 1 year on "A+" through "C-2" credit provided the primary borrower's
risk (FICO) score is 580 or greater. Under this program, the bankruptcy lookback
periods on "A-1" and "A-2" credit also may be reduced from 3 years to 2 years
provided the borrower's risk (FICO) score is 580 or greater.
Under the Originator's "Express Grade Program", the Originator will
consider only the mortgage, bankruptcy and foreclosure credit history, and not
the installment debt or other credit history, of a prospective borrower to
determine the borrower's credit risk grade. To be eligible for this program, a
prospective borrower must (1) be applying for a first lien mortgage loan secured
by owner occupied, single family detached residential housing under the
Originator's Full Documentation program and (2) have a minimum risk (FICO) score
of 610 for "A+" credit, 590 for "A-1" credit, 575 for "A-2" credit and 570 for
"B" credit. Under the "Express Grade Program", the mortgage, bankruptcy and
foreclosure credit history requirements for "A+", "A-1", "A-2" and "B" credit
risk borrowers differ in certain respects from the Originator's standard
requirements for these credit risk categories, depending on the loan-to-value
ratio and other factors. Under the program, the guidelines for debt
service-to-income ratio and loan-to-value ratio are the same as those for the
Originator's standard programs for these credit risk categories.
EXCEPTIONS. As described above, the Originator uses the foregoing
categories and characteristics as underwriting guidelines only. On a
case-by-case basis, it may determine that the prospective borrower warrants a
risk category upgrade, a debt service-to-income ratio exception, a pricing
exception, a loan-to-value exception or an exception from certain requirements
of a particular risk category. An upgrade or exception may generally be allowed
if the application reflects certain compensating factors, among others: reduced
loan-to-value ratio; good property
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maintenance; mortgage history consistent with the risk category upgrade; stable
employment; disposable income; the length of residence in the subject property
and credit score greater than or equal to 580.
Accordingly, the Originator may classify certain mortgage loan
applications in a more favorable risk category than other mortgage loan
applications that, in the absence of these compensating factors, would satisfy
only the criteria of a less favorable risk category.
THE SELLER
The Seller of the Mortgage Loans is Greenwich Capital Financial
Products, Inc., a Delaware corporation. The Seller previously acquired the
Mortgage Loans from an affiliate of the Originator.
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. The
Trust created under the Pooling Agreement will consist of (i) all of the
Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, Mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the rights of the Trustee under all
insurance policies required to be maintained pursuant to the Pooling Agreement,
(v) the Net WAC Rate Carryover Reserve Account and the rights of the Trustee
under the cap contract and (vi) the rights of the Depositor under the Master
Agreement (as assigned to the Depositor pursuant to the Assignment Agreement).
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the Closing Date, the Depositor will transfer to the
Trust all of its right, title and interest in and to each Closing Date Mortgage
Loan, the related mortgage note, Mortgage, assignment of mortgage (in recordable
form in blank or to the Trustee) and other related documents received from the
Originator pursuant to the Master Agreement (collectively, the "Related
Documents"), including all scheduled payments with respect to each such Mortgage
Loan due after the Cut-off Date. The Trustee, concurrently with such transfer,
will deliver the Certificates to the Depositor. Each Mortgage Loan transferred
to the Trust will be identified on a schedule (the "Mortgage Loan Schedule")
delivered to the Trustee pursuant to the Pooling Agreement. The Mortgage Loan
Schedule will include information such as the Principal Balance of each Closing
Date Mortgage Loan as of the Cut-off Date, its Mortgage Rate as well as other
information with respect to each Mortgage Loan.
The Pooling Agreement will require that, within the time period
specified therein, the Depositor will deliver or cause to be delivered to the
Trustee (or a custodian, as the Trustee's agent for such purpose) the mortgage
notes, endorsed to the Trustee on behalf of the Certificateholders, and the
Related Documents. In lieu of delivery of original Mortgages or mortgage notes,
if such original is not available or is lost, the Depositor may deliver or cause
to be delivered true and correct copies thereof, or, with respect to a lost
mortgage note, a lost note affidavit executed by the Originator.
Within 45 days of the Closing Date, the Trustee will review the
Mortgage Loans and the Related Documents pursuant to the Pooling Agreement and
if any Mortgage Loan or Related Document is found not to conform to the
Trustee's review criteria set forth in the Pooling Agreement and if any material
defect is not cured, the Trustee will enforce the Originator's obligations under
the related Master Agreement to either (i) as permitted pursuant to the related
Master Agreement, substitute for such Mortgage Loan a qualified substitute
mortgage loan or (ii) purchase such Mortgage Loan at a price (the "Purchase
Price") generally equal to the outstanding Principal Balance of such Mortgage
Loan as of the date of purchase, plus all accrued and unpaid interest thereon
and any costs and damages incurred by the Trust in connection with any violation
by such loan of any predatory- or abusive-lending law. The Purchase Price will
be required to be remitted to the Servicer for deposit in the Collection Account
(as defined herein) on or prior to the next succeeding Determination Date (as
defined herein) after such obligation arises. The obligation of the Originator
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to repurchase or substitute for a Deleted Mortgage Loan (as defined herein) are
the only remedies regarding any defects in the Mortgage Loans and Related
Documents available to the Trustee or the Certificateholders.
In connection with the substitution of a qualified substitute mortgage
loan, the Originator or the Seller, as applicable, will be required to remit to
the Servicer for deposit in the Collection Account on or prior to the next
succeeding Determination Date after such obligation arises an amount (the
"Substitution Adjustment") equal to the excess of the Principal Balance of the
related Deleted Mortgage Loan over the Principal Balance of such Qualified
Substitute Mortgage Loan.
Pursuant to the Master Agreement (as assigned to the Depositor pursuant
to the Assignment Agreement and to the Trustee pursuant to the Pooling
Agreement), the Originator made certain representations and warranties as to the
accuracy in all material respects of certain information with respect to each
Mortgage Loan (e.g., the Mortgage Rate). In addition, pursuant to the Master
Agreement, the Originator represented and warranted that, among other things:
(i) at the time of transfer, the Originator transferred or assigned all of its
right, title and interest in each Mortgage Loan and the Related Documents, free
of any lien and (ii) each Mortgage Loan complied, at the time of origination, in
all material respects with applicable federal, state and local laws. Pursuant to
the Assignment Agreement, the Seller will make certain limited additional
representations and warranties regarding the Mortgage Loans. Upon discovery of a
breach of any such representation and warranty which materially and adversely
affects the interests of the Certificateholders in the related Mortgage Loan and
Related Documents, the Trustee will enforce the obligations of the Originator
under the Master Agreement or the obligations of the Seller under the Assignment
Agreement to effect a cure by either (i) as permitted pursuant to the Master
Agreement or pursuant to the Assignment Agreement, as applicable, substituting
for such Deleted Mortgage Loan a qualified substitute mortgage loan or (ii)
repurchasing such Deleted Mortgage Loan from the Trust at a price generally
equal to the Purchase Price, in each case to the extent set forth in the Master
Agreement or the Assignment Agreement, as applicable. The same procedure and
limitations that are set forth above for the substitution or repurchase of
Deleted Mortgage Loans as a result of deficient documentation relating thereto
will apply to the substitution or purchase of a Deleted Mortgage Loan as a
result of a breach of a representation or warranty in the Master Agreement or
the Assignment Agreement that materially and adversely affects the interests of
the Certificateholders. Notwithstanding the foregoing, to the extent of a breach
by the Originator and the Seller of any representation, warranty or covenant
under the Master Agreement and the Assignment Agreement in respect of any
Mortgage Loan which materially adversely affects the value of such Mortgage Loan
or the interest therein of the Certificateholders, the Trustee will first
request that the Originator cure such breach or repurchase such Mortgage Loan
and if the Originator fails to cure such breach or repurchase such Mortgage Loan
within 60 days of receipt of such request from the Trustee, the Trustee will
then request that the Seller cure such breach or repurchase such Mortgage Loan.
Mortgage Loans required to be transferred to the Originator as
described in the preceding paragraphs are referred to as "Deleted Mortgage
Loans."
Pursuant to the Pooling Agreement, the Servicer will service and
administer the Mortgage Loans as more fully set forth therein. In addition, the
Servicer will represent and warrant, on the Closing Date, that, among other
things it will accurately and fully report its mortgagor credit files to each of
the credit repositories in a timely manner.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer will establish and maintain or cause to be maintained one
or more separate trust accounts (each, a "Collection Account") for the benefit
of the Certificateholders. Each Collection Account will be an Eligible Account
(as defined in the Pooling Agreement). Upon receipt by the Servicer of amounts
in respect of the Mortgage Loans (excluding amounts representing the Servicing
Fee or other servicing compensation, reimbursement for Advances and Servicing
Advances and insurance proceeds to be applied to the restoration or repair of a
Mortgaged Property), the Servicer will deposit such amounts in the Collection
Account. Amounts so deposited may be invested in Permitted Investments (as
described in the Pooling Agreement) maturing no later than one Business Day
prior to the date on which the amount on deposit therein is required to be
deposited in the Distribution Account. The Trustee will establish an account
(the "Distribution Account") into which will be deposited amounts withdrawn from
the Collection Account for distribution to Certificateholders on a Distribution
Date and payment of certain fees and expenses of the Trust. The
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Distribution Account will be an Eligible Account. Amounts on deposit therein may
be invested in Permitted Investments maturing on or before the second Business
Day prior to the related Distribution Date.
THE SERVICER
The information set forth in the following paragraphs has been provided
by the Servicer. None of the Depositor, the Trustee, the Seller, the
Underwriters or any of their affiliates has made or will make any representation
as to the accuracy or completeness of such information.
The Servicer has been servicing loans since March 1997, when it assumed
the default management cycle of loans previously handled by CTX Mortgage
Company, LLC, a seller/servicer of primarily conforming mortgage loans. The
Servicer or one of its affiliates originates all of the loans it services, other
than those purchased by it from wholesale sources. Servicing encompasses, among
other activities, the following processes: billing and collection of payments
when due, movement and reporting of cash to the payment clearing bank accounts,
customer help, reconveyance, recovery of delinquent installments, instituting
foreclosure and liquidation of the underlying collateral. As of March 31, 2004,
the Servicer was servicing a loan portfolio of approximately $7.1 billion. The
Servicer's most current rating as a residential subprime loan servicer is
"RPS2+" by Fitch Ratings, dated June 9, 2004. The Servicer was ranked "above
average" as a residential subprime loan servicer by S&P in November 2002.
The Servicer commenced its servicing activities of mortgage loans
similar to the Mortgage Loans in October 1997. The following tables set forth
the Servicer's delinquency and loss experience as of the dates and for the
periods indicated with respect to (i) mortgage loans originated or acquired, and
serviced, by the Servicer that are warehoused in the Harwood Street Funding II,
LLC mortgage loan warehouse facility and (ii) securitized mortgage loans
originated or acquired, and serviced, by the Servicer. These mortgage loans are
similar in type to the Mortgage Loans. No mortgage loan is considered delinquent
for purposes of the table until a payment is one calendar month past due on a
contractual basis. The delinquency and loss percentages may be affected by the
size and relative lack of seasoning of this servicing portfolio which increased
from approximately $3,194,662,766 at March 31, 2001 to approximately
$6,917,956,374 at March 31, 2004. The Servicer believes that as the existing
loan portfolio becomes more seasoned, the rate of delinquencies, loan losses,
foreclosures and REO properties will increase. Accordingly, the information in
the tables below is for illustrative purposes only and is not intended to
indicate or predict the expected delinquency or loss experience on past, current
or future pools of home equity loans for which the Servicer is the servicer.
DELINQUENCY EXPERIENCE
---------------------------------------------------------------------------------------------------
AS OF MARCH 31, 2004 AS OF MARCH 31, 2003 AS OF MARCH 31, 2002 AS OF MARCH 31, 2001
-------------------- -------------------- -------------------- --------------------
By By By By By By By By
Number Dollar Number Dollar Number Dollar Number Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------ -------- ------
Portfolio(1)................. 82,966 $6,917,956,374 70,257 $5,156,184,338 60,689 $4,218,240,230 48,382 $3,194,662,766
Delinquency Percentage
30 to 59 days............... 3.06% 2.41% 2.79% 2.30% 2.98% 2.44% 2.43% 2.23%
60 to 89 days............... 1.00% 0.79% 1.19% 1.04% 1.02% 0.90% 0.88% 0.83%
90 days and over............ 3.04% 2.58% 3.56% 3.24% 3.58% 3.33% 2.88% 2.91%
Total Delinquency
Percentage(2)(3)............ 7.10% 5.78% 7.54% 6.58% 7.58% 6.68% 6.19% 5.97%
---- ---- ---- ---- ---- ---- ---- ----
Percentage of REO Properties. 2.11% 1.76% 1.92% 1.82% 1.56% 1.60% 1.02% 0.99%
==== ==== ==== ==== ==== ==== ==== ====
- ------------------
(1) Portfolio includes (i) loans originated or acquired, and serviced, by the
Servicer that are warehoused in the Harwood Street Funding II, LLC mortgage
loan warehouse facility and (ii) securitized loans originated or acquired,
and serviced, by the Servicer.
(2) Excludes REO properties.
(3) Totals may not sum due to rounding.
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LOSS EXPERIENCE
------------------------------------------------------------------------------
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003 MARCH 31, 2002 MARCH 31, 2001
DOLLAR AMOUNT ($) DOLLAR AMOUNT ($) DOLLAR AMOUNT ($) DOLLAR AMOUNT ($)
----------------- ----------------- ----------------- -----------------
Average Portfolio(1)...... $6,124,058,391 $4,683,329,780 $3,771,149,660 $2,426,991,892
Net Losses(2)............. 75,728,562 59,789,421 32,555,537 18,673,245
Net Losses as a Percentage of
Average Portfolio........ 1.24% 1.28% 0.86% 0.77%
- ------------------
(1) "Average Portfolio" during the period is the arithmetic average of the
principal balances of the loans outstanding on the last day of each month
during the period. Portfolio includes (i) loans originated or acquired, and
serviced, by the Servicer that are warehoused in the Harwood Street Funding
II, LLC mortgage loan warehouse facility and (ii) securitized loans
originated or acquired, and serviced, by the Servicer.
(2) "Net Losses" means gross losses minus recoveries.
ADVANCES
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced on or before each Distribution Date from (i) its
own funds or funds provided by an Advancing Person as described below, (ii)
funds in the Collection Account that are not included in the Available Funds for
such Distribution Date or (iii) (a) the aggregate of all payments of principal
and interest (net of Servicing Fees) that were due during the related Due Period
on the Mortgage Loans, other than Balloon Payments, and that were delinquent on
the related Determination Date, plus certain amounts representing assumed
payments not covered by any current net income on the Mortgaged Properties
acquired by foreclosure or deed in lieu of foreclosure and (b) with respect to
Balloon Loans, with respect to which the Balloon Payment is not made when due,
an assumed monthly payment that would have been due on the related Due Date
based on the original principal amortization schedule for such Balloon Loan (any
such advance, an "Advance").
Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, insurance
proceeds, condemnation proceeds and liquidation proceeds. The purpose of making
such Advances is to maintain a regular cash flow to the Certificateholders,
rather than to guarantee or insure against losses. The Servicer will not be
required, however, to make any Advances with respect to reductions in the amount
of the monthly payments on the Mortgage Loans due to bankruptcy proceedings or
the application of the Relief Act. Subject to the recoverability standard above,
the Servicer's obligation to make Advances as to any Mortgage Loan will continue
until the Mortgage Loan is paid in full or until the recovery of all Liquidation
Proceeds thereon.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made unless
such amounts are deemed to be nonrecoverable by the Servicer from the proceeds
of the related Mortgage Loan, in which event reimbursement will be made to the
Servicer from general funds in the Collection Account. The Servicer may recover
from amounts in the Collection Account the amount of any Advance that remains
unreimbursed to the Servicer from the related liquidation proceeds after the
final liquidation of the related Mortgage Loan, and such reimbursement amount
will not be available for remittance to the Trustee for distribution on the
Certificates. In the event the Servicer fails in its obligation to make any
required Advance, the Trustee, in its capacity as successor Servicer, will be
obligated to make any such Advance, to the extent required in the Pooling
Agreement.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of- pocket" costs and expenses
(including reasonable attorneys' fees and disbursements) incurred in the
performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage and (iv) certain insurance
premiums and certain ongoing expenses associated with the Mortgage Pool and
incurred by the Servicer in connection with its responsibilities under the
Pooling Agreement. Each such expenditure will constitute a "Servicing Advance."
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Servicing Advances are required to be made only to the extent they are
deemed by the Servicer to be recoverable from related late collections,
insurance proceeds, condemnation proceeds and liquidation proceeds. The
Servicer's right to reimbursement for Servicing Advances is limited to late
collections on the related Mortgage Loan, including liquidation proceeds,
condemnation proceeds, released mortgaged property proceeds, insurance proceeds
and such other amounts as may be collected by the Servicer from the related
mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Servicer from the proceeds of the related Mortgage Loan,
in which event reimbursement will be made to the Servicer from general funds in
the Collection Account.
The Pooling Agreement provides that the Servicer may enter into a
facility with any person which provides that such person (an "Advancing Person")
may fund Advances and/or Servicing Advances, although no such facility will
reduce or otherwise affect the Servicer's obligation to fund such Advances
and/or Servicing Advances. Any Advances and/or Servicing Advances made by an
Advancing Person will be reimbursed to the Advancing Person in the same manner
as reimbursements would be made to the Servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Servicer in respect of its
servicing activities (the "Servicing Fee") for the Mortgage Loans will be at the
"Servicing Fee Rate" of 0.50% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Servicer is entitled to
retain all service-related fees, including assumption fees, modification fees,
extension fees, late payment charges and Prepayment Interest Excess (as defined
in the Pooling Agreement), non-sufficient fund fees and other ancillary fees
(but not prepayment charges, which
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will be distributed to the holders of the Class P Certificates), to the extent
collected from mortgagors, together with any interest or other income earned on
funds held in the Collection Account and any Servicing Accounts. The Servicer is
obligated to deposit into the Collection Account the amount of any Prepayment
Interest Shortfall (payments made by the Servicer in satisfaction of such
obligation, "Compensating Interest") but only in an amount up to its Servicing
Fee for the related Distribution Date.
With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment in full was applied during the portion of the
related Prepayment Period (as defined below) occurring in the month preceding
the month of such Determination Date, the "Prepayment Interest Shortfall" is an
amount equal to interest at the applicable Mortgage Rate (net of the Servicing
Fee) on the amount of such principal prepayment for the number of days
commencing on the date such principal prepayment was applied and ending on the
last day of the month in which the related Prepayment Period began.
THE TRUSTEE
JPMorgan Chase Bank, a New York banking corporation, will be named
Trustee pursuant to the Pooling Agreement. The Trustee will make available a
monthly statement to Certificateholders containing information regarding the
Certificates. The Trustee may make such statement available each month, to any
interested party, via the Trustee's website. See "Description of the
Certificates--Reports to Certificateholders."
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling Agreement will be equal to certain investment
earnings on the amounts on deposit in the Distribution Account and a fee (the
"Trustee Fee") equal to accrued interest at the "Trustee Fee Rate" of 0.0075%
per annum on the Principal Balance of the Mortgage Loans. The Pooling Agreement
will provide that the Trustee and any director, officer, employee or agent of
the Trustee will be indemnified by the Trust and will be held harmless against
any loss, liability or "unanticipated out-of- pocket" expense incurred or paid
to third parties (which expenses shall not include salaries paid to employees,
or allocable overhead, of the Trustee) incurred by the Trustee arising out of or
in connection with the acceptance or administration of its obligations and
duties under the Pooling Agreement, other than any loss, liability or expense
(i) that constitutes a specific liability of the Trustee under the Pooling
Agreement or (ii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Pooling
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trustee's obligations and duties under the Pooling
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Agreement. The Pooling Agreement will provide that the Trustee may withdraw
amounts owing to it under the Pooling Agreement prior to distributions to
Certificateholders.
VOTING RIGHTS
At all times 98% of all voting rights will be allocated among the
holders of the Offered Certificates, the Class B Certificates and the Class C
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates. At all times 1% of all voting rights
will be allocated to the holders of the Class P Certificates and 1% of all
voting rights will be allocated to the holders of the Residual Certificates. The
voting rights allocated to any class of Certificates will be allocated among all
holders of the Certificates of such class in proportion to the outstanding
percentage interests of such holders in such class.
AMENDMENT
The Pooling Agreement may be amended under the circumstances set forth
under "The Agreements --Amendment" in the prospectus.
TERMINATION
The majority holder of the Class C Certificates (unless such holder is
the Seller, Greenwich Capital Markets, Inc. or an affiliate of either of them),
or if such holder (x) fails to exercise such option or (y) is the Seller,
Greenwich Capital Markets, Inc. or an affiliate of either of them, the Servicer
(with the written consent of the Depositor or an affiliate thereof, such consent
not to be unreasonably withheld) (either such holder or the Servicer, as
applicable, the "Terminator") will have the right to purchase all of the
Mortgage Loans and REO Properties and thereby effect the early retirement of the
Certificates, on any Distribution Date on which the aggregate Principal Balance
of the Mortgage Loans (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and REO Properties is equal to or less than 10% of the aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date. The first
Distribution Date on which such option could be exercised is referred to herein
as the "Optional Termination Date." In the event that the option is exercised,
the purchase will be made at a price (the "Termination Price") generally equal
to the greater of (i) the aggregate Principal Balance of the Mortgage Loans and
the appraised value of the REO Properties and (ii) the fair market value of the
Mortgage Loans and the REO Properties, in each case plus accrued and unpaid
interest for each Mortgage Loan at the related Mortgage Rate to but not
including the first day of the month in which such repurchase price is paid plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Net WAC
Rate Carryover Amounts. However, this option may only be exercised if the
Termination Price is sufficient to pay all interest accrued on, as well as
amounts necessary to retire the note balance of, the notes issued pursuant to
any indenture which are secured by all or a portion of the Class C Certificates,
the Class P Certificates and/or the Residual Certificates. In the event the
Terminator exercises this option, the portion of the purchase price allocable to
the Offered Certificates and the Class B Certificates will be, to the extent of
available funds:
(i) 100% of the then outstanding Certificate Principal Balance of
the Offered Certificates and the Class B Certificates, plus
(ii) interest for the final Accrual Period on the then outstanding
Certificate Principal Balance of the Offered Certificates and
the Class B Certificates at the then applicable Pass-Through
Rate for the class, plus
(iii) any previously accrued but unpaid interest thereon to which
the holders of the Offered Certificates and the Class B
Certificates are entitled, together with the amount of any Net
WAC Rate Carryover Amounts (payable to and from the Net WAC
Rate Carryover Reserve Account), plus
(iv) in the case of the Mezzanine Certificates and the Class B
Certificates, any previously unpaid Allocated Realized Loss
Amount.
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SERVICING OF DELINQUENT MORTGAGE LOANS
The Servicer will be required to act with respect to delinquent
Mortgage Loans in accordance with procedures set forth in the Pooling Agreement.
These procedures, as followed with respect to any delinquent Mortgage Loan, may,
among other things, result in (i) foreclosing on such Mortgage Loan, (ii)
accepting the deed to the related Mortgaged Property in lieu of foreclosure,
(iii) granting the borrower under such Mortgage Loan a modification or
forbearance or (iv) accepting payment from the borrower under such Mortgage Loan
of an amount less than the Principal Balance of such Mortgage Loan in final
satisfaction of such Mortgage Loan. These procedures are intended to lead to the
alternative that would result in the recovery by the Trust of the highest net
present value of proceeds on such Mortgage Loan. However, there can be no
assurance that following such procedures will have that result or that following
such procedures will lead to the alternative that is in the best interests of
the Certificateholders. If the Servicer extends the payment period or accepts a
lesser amount than stated in the mortgage note in satisfaction of the mortgage
note, your yield may be affected.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. Set
forth below are summaries of the specific terms and provisions pursuant to which
the Offered Certificates will be issued. The following summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling Agreement. When particular
provisions or terms used in the Pooling Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
The Trust will issue (i) the Class A-1 Certificates, the Class A-2
Certificates and the Class A-3 Certificates (collectively, the "Class A
Certificates"), (ii) the Class M-1 Certificates, the Class M-2 Certificates, the
Class M-3 Certificates, the Class M-4 Certificates, the Class M-5 Certificates,
the Class M-6 Certificates, the Class M-7 Certificates, the Class M-8
Certificates and the Class M-9 Certificates (collectively, the "Mezzanine
Certificates"), (iii) the Class B-1 Certificates and the Class B-2 Certificates
(together, the "Class B Certificates"), (iv) the Class C Certificates (together
with the Mezzanine Certificates and the Class B Certificates, the "Subordinate
Certificates"), (iv) the Class P Certificates and (v) the Class R Certificates
and the Class R-X Certificates (together, the "Residual Certificates"). The
Class A Certificates, the Mezzanine Certificates, the Class B Certificates, the
Class C Certificates, the Class P Certificates and the Residual Certificates are
collectively referred to herein as the "Certificates." Only the Class A
Certificates and the Mezzanine Certificates are offered hereby (together, the
"Offered Certificates").
The Offered Certificates will have the Original Certificate Principal
Balances specified on the cover hereof, subject to a permitted variance of plus
or minus five percent. The Class B-1 Certificates will have an Original
Certificate Principal Balance equal to $3,094,000. The Class B-2 Certificates
will have an Original Certificate Principal Balance equal to $3,094,000. The
Class C Certificates will have an Original Certificate Principal Balance equal
to the excess of the aggregate Principal Balance of the Mortgage Loans as of the
Cut-off Date over the Original Certificate Principal Balances of the Offered
Certificates, the Class B Certificates and the Class P Certificates. The Class P
Certificates will have an Original Certificate Principal Balance of $100 and
will not bear interest. The Class P Certificates will be entitled to all
prepayment charges received in respect of the Mortgage Loans and such amounts
will not be available for distribution to the holders of the Offered
Certificates. The Residual Certificates will not have Original Certificate
Principal Balances and will not bear interest.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $25,000 and integral multiples of $1.00 in excess thereof. The assumed final
maturity date (the "Assumed Final Distribution Date") for the Certificates is
the Distribution Date in July 2034.
Distributions on the Offered Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in August 2004 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the Record Date. The "Record Date" for any Certificate
issued in book-entry form is the business day immediately preceding such
Distribution
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Date and the "Record Date" for any physical Certificate or any book-entry
Certificate that becomes a Definitive Certificate (as defined herein), will be
the last business day of the month immediately preceding the month in which the
related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Book-Entry Certificates ("Certificate Owners") will hold such
Certificates through The Depository Trust Company ("DTC") in the United States,
or upon request through Clearstream Banking Luxembourg, formerly known as
Cedelbank SA ("Clearstream"), or the Euroclear System ("Euroclear") (in Europe)
if they are participants of such systems, or indirectly through organizations
which are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate Certificate
Principal Balance of such Certificates and will initially be registered in the
name of Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Clearstream and JP Morgan Chase Bank will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $25,000.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling Agreement. Certificate Owners are only permitted to exercise
their rights indirectly through DTC and participants of DTC ("DTC
Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates. DTC
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective DTC
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Book-Entry Certificates will be executed through DTC
and the accounts of the respective DTC Participants at DTC will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Certificate Owners.
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Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Federal Income Tax
Consequences--REMICS--Backup Withholding With Respect to REMIC Certificates" and
"--Foreign Investors in REMIC Certificates" in the prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream Participants and Euroclear Participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its DTC Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, a
Luxembourg limited liability company, was formed in January 2000 through the
merger of Cedel International and Deutsche Boerse Clearing, the shareholders of
which comprise 93 of the world's major financial institutions.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, "IML," the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with the Euroclear Operator (as
defined below) in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
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Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between its
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash. The
Euroclear System is owned by Euroclear plc and operated through a license
agreement by Euroclear Bank S.A./N.V., a bank incorporated under the laws of the
Kingdom of Belgium (the "Euroclear Operator"). The Euroclear Operator is
regulated and examined by the Belgian Banking and Finance Commission and the
National Bank of Belgium.
The Euroclear Operator holds securities and book-entry interests in
securities for participating organizations and facilitates the clearance and
settlement of securities transactions between Euroclear Participants, and
between Euroclear Participants and participants of certain other securities
intermediaries through electronic book-entry changes in accounts of such
participants or other securities intermediaries. The Euroclear Operator provides
Euroclear Participants, among other things, with safekeeping, administration,
clearance and settlement, securities lending and borrowing, and related
services.
Non-Participants of Euroclear may hold and transfer book-entry
interests in the Book-Entry Certificates through accounts with a Euroclear
Participant or any other securities intermediary that holds a book-entry
interest in the Book- Entry Certificates through one or more securities
intermediaries standing between such other securities intermediary and the
Euroclear Operator.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co. DTC will be responsible for
crediting the amount of such distributions to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such distributions to the Certificate Owners
of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Consequences--REMICS--Backup Withholding With Respect to
REMIC Certificates" and "--Foreign Investors in REMIC Certificates" in the
prospectus. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Certificate Owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book- Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In addition,
issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Certificate Owners are credited.
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DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Clearstream or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Certificateholder under the
Pooling Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related DTC
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book- Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of a
Servicer Event of Termination (as defined in the Pooling Agreement), Certificate
Owners having percentage interests aggregating not less than 51% of the
Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer, the Seller or the Trustee will
have any responsibility for any aspect of the records relating to or payments
made on account of beneficial ownership interests of the Book-Entry Certificates
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. With respect to any
Distribution Date, "Available Funds" will be equal to the sum of the following
amounts with respect to the Mortgage Loans, net of amounts reimbursable
therefrom to the Servicer or the Trustee: (i) the aggregate amount of monthly
payments on the Mortgage Loans due on the related Due Date and received by the
Servicer by the Determination Date, after deduction of the Trustee Fee for such
Distribution Date, the Servicing Fee for such Distribution Date and any accrued
and unpaid Trustee Fees and Servicing Fees in respect of any prior Distribution
Dates, (ii) certain unscheduled payments in respect of the Mortgage Loans,
including prepayments, Insurance Proceeds, Net Liquidation Proceeds, Subsequent
Recoveries and proceeds from repurchases of and substitutions for such Mortgage
Loans occurring during the related Prepayment Period, excluding prepayment
charges and (iii) payments from the Servicer in connection with Advances and
Prepayment Interest Shortfalls for such Distribution Date. The holders of the
Class P Certificates will be entitled to all prepayment charges received on the
Mortgage Loans and such amounts will not be available for distribution to the
holders of the Offered Certificates.
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INTEREST DISTRIBUTIONS
On each Distribution Date the Trustee will withdraw from the
Distribution Account that portion of Available Funds for such Distribution Date
consisting of the Interest Remittance Amount for such Distribution Date, and
make the following disbursements and transfers in the order of priority
described below, in each case to the extent of the Interest Remittance Amount
remaining for such Distribution Date.
(i) concurrently, to the holders of the Class A Certificates, on a PRO
RATA basis based on the entitlement of each such class, the Monthly Interest
Distributable Amount and the Unpaid Interest Shortfall Amount, if any, for such
Certificates;
(ii) to the holders of the Class M-1 Certificates, the related Monthly
Interest Distributable Amount;
(iii) to the holders of the Class M-2 Certificates, the related Monthly
Interest Distributable Amount;
(iv) to the holders of the Class M-3 Certificates, the related Monthly
Interest Distributable Amount;
(v) to the holders of the Class M-4 Certificates, the related Monthly
Interest Distributable Amount;
(vi) to the holders of the Class M-5 Certificates, the related Monthly
Interest Distributable Amount;
(vii) to the holders of the Class M-6 Certificates, the related Monthly
Interest Distributable Amount;
(viii) to the holders of the Class M-7 Certificates, the related
Monthly Interest Distributable Amount;
(ix) to the holders of the Class M-8 Certificates, the related Monthly
Interest Distributable Amount;
(x) to the holders of the Class M-9 Certificates, the related Monthly
Interest Distributable Amount;
(xi) to the holders of the Class B-1 Certificates, the related Monthly
Interest Distributable Amount; and
(xii) to the holders of the Class B-2 Certificates, the related Monthly
Interest Distributable Amount.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Servicer will be allocated, first,
to the interest distribution amount with respect to the Class C Certificates,
and thereafter, to the Monthly Interest Distributable Amounts with respect to
the Offered Certificates and the Class B Certificates on a PRO RATA basis based
on the respective amounts of interest accrued on such Certificates for such
Distribution Date. THE HOLDERS OF THE OFFERED CERTIFICATES AND THE CLASS B
CERTIFICATES WILL NOT BE ENTITLED TO REIMBURSEMENT FOR ANY SUCH INTEREST
SHORTFALLS.
PRINCIPAL DISTRIBUTIONS
I. On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the Principal Distribution Amount will be distributed in the following
amounts and order of priority:
(i) first, to the holders of the Class A Certificates (allocated among
the Class A Certificates in the priority described below), until the Certificate
Principal Balances thereof have been reduced to zero;
(ii) second, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iii) third, to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
S-46
(iv) fourth, to the holders of the Class M-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(v) fifth, to the holders of the Class M-4 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vi) sixth, to the holders of the Class M-5 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(vii) seventh, to the holders of the Class M-6 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(viii) eighth, to the holders of the Class M-7 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(ix) ninth, to the holders of the Class M-8 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(x) tenth, to the holders of the Class M-9 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(xi) eleventh, to the holders of the Class B-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(xii) twelfth, to the holders of the Class B-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
II. On each Distribution Date (a) on or after the Stepdown Date and (b)
on which a Trigger Event is not in effect, distributions in respect of principal
to the extent of the Principal Distribution Amount will be distributed in the
following amounts and order of priority:
(i) first, to the holders of the Class A Certificates (allocated among
the Class A Certificates in the priority described below), the Senior Principal
Distribution Amount until the Certificate Principal Balances thereof have been
reduced to zero;
(ii) second, to the holders of the Class M-1 Certificates, the Class
M-1 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero;
(iii) third, to the holders of the Class M-2 Certificates, the Class
M-2 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero;
(iv) fourth, to the holders of the Class M-3 Certificates, the Class
M-3 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero;
(v) fifth, to the holders of the Class M-4 Certificates, the Class M-4
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero;
(vi) sixth, to the holders of the Class M-5 Certificates, the Class M-5
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero;
(vii) seventh, to the holders of the Class M-6 Certificates, the Class
M-6 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero;
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(viii) eighth, to the holders of the Class M-7 Certificates, the Class
M-7 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero;
(ix) ninth, to the holders of the Class M-8 Certificates, the Class M-8
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero;
(x) tenth, to the holders of the Class M-9 Certificates, the Class M-9
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero;
(xi) eleventh, to the holders of the Class B-1 Certificates, the Class
B-1 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero; and
(xii) twelfth, to the holders of the Class B-2 Certificates, the Class
B-2 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero.
With respect to the Class A Certificates, all principal distributions
will be distributed sequentially, first, to the holders of the Class A-1
Certificates, until the Certificate Principal Balance of the Class A-1
Certificates has been reduced to zero, second, to the holders of the Class A-2
Certificates, until the Certificate Principal Balance of the Class A-2
Certificates has been reduced to zero and third, to the holders of the Class A-3
Certificates, until the Certificate Principal Balance of the Class A-3
Certificates has been reduced to zero; provided, however, on any Distribution
Date on which the aggregate Certificate Principal Balance of the Subordinate
Certificates has been reduced to zero, notwithstanding anything contained herein
to the contrary, all distributions of principal to the Class A Certificates will
be distributed concurrently, on a PRO RATA basis based on the Certificate
Principal Balance of each such class.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the Principal Balance
of the Mortgage Loans evidenced by the Subordinate Certificates. Increasing the
respective percentage interest in the Trust of the Subordinate Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
Class A Certificates consists of subordination, as described under
"--Subordination" below, allocation of Realized Losses on the Mortgage Loans, as
described under "--Allocation of Losses" below, excess interest and
overcollateralization, as described under "--Overcollateralization Provisions"
herein and crosscollateralization as described under "--Allocation of Available
Funds" above.
SUBORDINATION
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described herein, to the
rights of the holders of the Class A Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Certificates of the full amount of their scheduled monthly payments of
interest and principal and to afford such holders protection against Realized
Losses.
The protection afforded to the holders of the Class A Certificates by
means of the subordination of the Subordinate Certificates will be accomplished
by (i) the preferential right of the holders of the Class A Certificates to
receive on any Distribution Date, prior to distribution on the Subordinate
Certificates, distributions in respect of interest and principal, subject to
funds available for such distributions and (ii) if necessary, the right of the
holders of the Class A Certificates to receive future distributions of amounts
that would otherwise be payable to the holders of the Subordinate Certificates.
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In addition, the rights of the holders of the Class M-1 Certificates to
receive distributions will be senior to the rights of holders of the Class M-2
Certificates, the rights of the holders of the Class M-2 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-3
Certificates, the rights of the holders of the Class M-3 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-4
Certificates, the rights of the holders of the Class M-4 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-5
Certificates, the rights of the holders of the Class M-5 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-6
Certificates, the rights of the holders of the Class M-6 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-7
Certificates, the rights of the holders of the Class M-7 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-8
Certificates, the rights of the holders of the Class M-8 Certificates to receive
distributions will be senior to the rights of the holders of the Class M-9
Certificates, the rights of the holders of the Class M-9 Certificates to receive
distributions will be senior to the rights of the holders of the Class B-1
Certificates, the rights of the holders of the Class B-1 Certificates to receive
distributions will be senior in right to the rights of the holders of the B-2
Certificates and the rights of the holders of the Mezzanine Certificates and the
Class B Certificates to receive distributions will be senior to the rights of
the holders of the Class C Certificates, in each case to the extent described
herein. This subordination is intended to enhance the likelihood of regular
receipt by the holders of more senior Certificates of distributions in respect
of interest and principal and to afford such holders protection against Realized
Losses.
ALLOCATION OF LOSSES
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date, first, to Net Monthly Excess Cashflow, second, to the Class C
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero, third, to the Class B-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero, fourth, to the Class B-1 Certificates,
until the Certificate Principal Balance thereof has been reduced to zero, fifth,
to the Class M-9 Certificates, until the Certificate Principal Balance thereof
has been reduced to zero, sixth, to the Class M-8 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero, seventh, to the
Class M-7 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero, eighth, to the Class M-6 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero, ninth, to the Class M-5
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero, tenth, to the Class M-4 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero, eleventh, to the Class M-3
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero, twelfth, to the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero and, thirteenth, to the Class M-1
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero.
The Pooling Agreement does not permit the allocation of Realized Losses
to the Class A Certificates, the Class P Certificates or the Residual
Certificates. Investors in the Class A Certificates should note that although
Realized Losses cannot be allocated to the Class A Certificates, under certain
loss scenarios there will not be enough interest and principal on the Mortgage
Loans to distribute the Class A Certificates all interest and principal amounts
to which they are then entitled.
Any allocation of a Realized Loss to a Mezzanine Certificate or Class B
Certificate will be made by reducing the Certificate Principal Balance thereof
by the amount so allocated as of the Distribution Date in the month following
the calendar month in which such Realized Loss was incurred. Notwithstanding
anything to the contrary described herein, in no event will the Certificate
Principal Balance of any Mezzanine Certificate or Class B Certificate be reduced
more than once in respect of any particular amount both (i) allocable to such
Certificate in respect of Realized Losses and (ii) distributable as principal to
the holder of such Certificate from Net Monthly Excess Cashflow.
Once Realized Losses have been allocated to the Mezzanine Certificates
or the Class B Certificates, such amounts with respect to such Certificates will
no longer accrue interest nor will such amounts be reinstated thereafter (except
in the case of Subsequent Recoveries). However, Allocated Realized Loss Amounts
may be paid to the holders of the Mezzanine Certificates and the Class B
Certificates from Net Monthly Excess Cashflow, according to the priorities set
forth under "--Overcollateralization Provisions" below.
S-49
OVERCOLLATERALIZATION PROVISIONS
The weighted average net Mortgage Rate for the Mortgage Loans is
generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates and the Class B Certificates and the amount
needed to pay certain fees and expenses of the Trust. As a result, interest
collections on the Mortgage Loans are expected to exceed the amount of interest
distributable to the holders of the Offered Certificates and the Class B
Certificates and the fees and expenses payable by the Trust. The Pooling
Agreement requires that, on each Distribution Date, the Net Monthly Excess
Cashflow, if any, be distributed as follows:
(i) to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal, in an amount equal to
any Extra Principal Distribution Amount, distributable to such holders as part
of the Principal Distribution Amount as described under "--Allocation of
Available Funds--Principal Distributions" above;
(ii) to the holders of the Class M-1 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(iii) to the holders of the Class M-1 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
(iv) to the holders of the Class M-2 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(v) to the holders of the Class M-2 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to such Certificates;
(vi) to the holders of the Class M-3 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(vii) to the holders of the Class M-3 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
(viii) to the holders of the Class M-4 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(ix) to the holders of the Class M-4 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
(x) to the holders of the Class M-5 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount allocable to such Certificates;
(xi) to the holders of the Class M-5 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
(xii) to the holders of the Class M-6 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(xiii) to the holders of the Class M-6 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
(xiv) to the holders of the Class M-7 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(xv) to the holders of the Class M-7 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
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(xvi) to the holders of the Class M-8 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(xvii) to the holders of the Class M-8 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
(xviii) to the holders of the Class M-9 Certificates, in an amount
equal to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(xix) to the holders of the Class M-9 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
(xx) to the holders of the Class B-1 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(xxi) to the holders of the Class B-1 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to such Certificates;
(xxii) to the holders of the Class B-2 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(xxiii) to the holders of the Class B-2 Certificates, in an amount
equal to the Allocated Realized Loss Amount allocable to such Certificates;
(xxiv) to the Net WAC Rate Carryover Reserve Account, the amount by
which any Net WAC Rate Carryover Amounts for such Distribution Date exceed the
amounts received by the Trustee under the cap contract;
(xxv) to the holders of the Class C Certificates as provided in the
Pooling Agreement;
(xxvi) if such Distribution Date follows the Prepayment Period during
which occurs the latest date on which a prepayment charge may be required to be
paid in respect of any Mortgage Loan, to the holders of the Class P
Certificates, in reduction of the Certificate Principal Balance thereof, until
the Certificate Principal Balance thereof is reduced to zero; and
(xxvii) any remaining amounts to the holders of the Residual
Certificates as provided in the Pooling Agreement.
On each Distribution Date, after making the distributions of the
Available Funds as described above, the Trustee will withdraw from the Net WAC
Rate Carryover Reserve Account the amount deposited therein pursuant to
subclause (xxiv) above and will distribute these amounts to the holders of the
Offered Certificates and the Class B Certificates in the order and priority set
forth under "--Pass-Through Rates" herein.
On each Distribution Date, the Trustee will withdraw from the
Distribution Account all amounts representing prepayment charges, if any, in
respect of the Mortgage Loans received during the related Prepayment Period and
will distribute these amounts to the holders of the Class P Certificates.
S-51
DEFINITIONS
The "Accrual Period" for the Offered Certificates and the Class B
Certificates for a given Distribution Date will be the actual number of days
based on a 360-day year included in the period commencing on the immediately
preceding Distribution Date (or, in the case of the first such Accrual Period,
commencing on the Closing Date) and ending on the day immediately preceding such
Distribution Date.
An "Allocated Realized Loss Amount" with respect to any class of the
Mezzanine Certificates or the Class B Certificates and any Distribution Date is
an amount equal to the sum of any Realized Losses allocated to that class of
Certificates on the Distribution Date and any Allocated Realized Loss Amounts
for that class remaining unpaid from the previous Distribution Date minus any
Subsequent Recoveries applied to that Allocated Realized Loss Amount.
The "Basic Principal Distribution Amount" means with respect to any
Distribution Date, the excess of (i) the Principal Remittance Amount for such
Distribution Date over (ii) the Overcollateralization Release Amount, if any,
for such Distribution Date.
The "Certificate Principal Balance" of any Offered Certificate, Class B
Certificate or Class P Certificate immediately prior to any Distribution Date
will be equal to the Certificate Principal Balance thereof on the Closing Date
(the "Original Certificate Principal Balance") reduced by the sum of all amounts
actually distributed in respect of principal of such class and, in the case of a
Mezzanine Certificate or Class B Certificate, Realized Losses allocated thereto
on all prior Distribution Dates (taking into account any increases in the
Certificate Principal Balance thereof by any Subsequent Recoveries allocated to
that class). The "Certificate Principal Balance" of the Class C Certificates as
of any date of determination is equal to the excess, if any, of (a) the then
aggregate Principal Balance of the Mortgage Loans over (b) the then aggregate
Certificate Principal Balance of the Offered Certificates, the Class B
Certificates and the Class P Certificates.
The "Class B-1 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates (after taking into account the
distribution of the Class M-3 Principal Distribution Amount on such Distribution
Date), (v) the Certificate Principal Balance of the Class M-4 Certificates
(after taking into account the distribution of the Class M-4 Principal
Distribution Amount on such Distribution Date), (vi) the Certificate Principal
Balance of the Class M-5 Certificates (after taking into account the
distribution of the Class M-5 Principal Distribution Amount on such Distribution
Date), (vii) the Certificate Principal Balance of the Class M-6 Certificates
(after taking into account the distribution of the Class M-6 Principal
Distribution Amount on such Distribution Date), (viii) the Certificate Principal
Balance of the Class M-7 Certificates (after taking into account the
distribution of the Class M-7 Principal Distribution Amount on such Distribution
Date), (ix) the Certificate Principal Balance of the Class M-8 Certificates
(after taking into account the distribution of the Class M-8 Principal
Distribution Amount on such Distribution Date), (x) the Certificate Principal
Balance of the Class M-9 Certificates (after taking into account the
distribution of the Class M-9 Principal Distribution Amount on such Distribution
Date) and (xi) the Certificate Principal Balance of the Class B-1 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 96.00% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $1,546,979.01.
The "Class B-2 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1
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Certificates (after taking into account the distribution of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates (after taking into account the
distribution of the Class M-2 Principal Distribution Amount on such Distribution
Date), (iv) the Certificate Principal Balance of the Class M-3 Certificates
(after taking into account the distribution of the Class M-3 Principal
Distribution Amount on such Distribution Date), (v) the Certificate Principal
Balance of the Class M-4 Certificates (after taking into account the
distribution of the Class M-4 Principal Distribution Amount on such Distribution
Date), (vi) the Certificate Principal Balance of the Class M-5 Certificates
(after taking into account the distribution of the Class M-5 Principal
Distribution Amount on such Distribution Date), (vii) the Certificate Principal
Balance of the Class M-6 Certificates (after taking into account the
distribution of the Class M-6 Principal Distribution Amount on such Distribution
Date), (viii) the Certificate Principal Balance of the Class M-7 Certificates
(after taking into account the distribution of the Class M-7 Principal
Distribution Amount on such Distribution Date), (ix) the Certificate Principal
Balance of the Class M-8 Certificates (after taking into account the
distribution of the Class M-8 Principal Distribution Amount on such Distribution
Date), (x) the Certificate Principal Balance of the Class M-9 Certificates
(after taking into account the distribution of the Class M-9 Principal
Distribution Amount on such Distribution Date), (xi) the Certificate Principal
Balance of the Class B-1 Certificates (after taking into account the
distribution of the Class B-1 Principal Distribution Amount on such Distribution
Date) and (xii) the Certificate Principal Balance of the Class B-2 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 98.00% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $1,546,979.01.
The "Class M-1 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date) and (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i) 69.30% and
(ii) the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $1,546,979.01.
The "Class M-2 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date) and (iii) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 75.00% and (ii) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus $1,546,979.01.
The "Class M-3 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date) and (iv) the
Certificate Principal
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Balance of the Class M-3 Certificates immediately prior to such Distribution
Date over (y) the lesser of (A) the product of (i) 78.60% and (ii) the aggregate
Principal Balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) and (B)
the aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) minus $1,546,979.01.
The "Class M-4 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates (after taking into account the
distribution of the Class M-3 Principal Distribution Amount on such Distribution
Date) and (v) the Certificate Principal Balance of the Class M-4 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 81.70% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $1,546,979.01.
The "Class M-5 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates (after taking into account the
distribution of the Class M-3 Principal Distribution Amount on such Distribution
Date), (v) the Certificate Principal Balance of the Class M-4 Certificates
(after taking into account the distribution of the Class M-4 Principal
Distribution Amount on such Distribution Date) and (vi) the Certificate
Principal Balance of the Class M-5 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) 84.60% and (ii)
the aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $1,546,979.01.
The "Class M-6 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates (after taking into account the
distribution of the Class M-3 Principal Distribution Amount on such Distribution
Date), (v) the Certificate Principal Balance of the Class M-4 Certificates
(after taking into account the distribution of the Class M-4 Principal
Distribution Amount on such Distribution Date), (vi) the Certificate Principal
Balance of the Class M-5 Certificates (after taking into account the
distribution of the Class M-5 Principal Distribution Amount on such Distribution
Date) and (vii) the Certificate Principal Balance of the Class M-6 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 87.50% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled
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payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $1,546,979.01.
The "Class M-7 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates (after taking into account the
distribution of the Class M-3 Principal Distribution Amount on such Distribution
Date), (v) the Certificate Principal Balance of the Class M-4 Certificates
(after taking into account the distribution of the Class M-4 Principal
Distribution Amount on such Distribution Date), (vi) the Certificate Principal
Balance of the Class M-5 Certificates (after taking into account the
distribution of the Class M-5 Principal Distribution Amount on such Distribution
Date), (vii) the Certificate Principal Balance of the Class M-6 Certificates
(after taking into account the distribution of the Class M-6 Principal
Distribution Amount on such Distribution Date) and (viii) the Certificate
Principal Balance of the Class M-7 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) 89.90% and (ii)
the aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $1,546,979.01.
The "Class M-8 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal Balance of the Class M-3 Certificates (after taking into account the
distribution of the Class M-3 Principal Distribution Amount on such Distribution
Date), (v) the Certificate Principal Balance of the Class M-4 Certificates
(after taking into account the distribution of the Class M-4 Principal
Distribution Amount on such Distribution Date), (vi) the Certificate Principal
Balance of the Class M-5 Certificates (after taking into account the
distribution of the Class M-5 Principal Distribution Amount on such Distribution
Date), (vii) the Certificate Principal Balance of the Class M-6 Certificates
(after taking into account the distribution of the Class M-6 Principal
Distribution Amount on such Distribution Date), (viii) the Certificate Principal
Balance of the Class M-7 Certificates (after taking into account the
distribution of the Class M-7 Principal Distribution Amount on such Distribution
Date) and (ix) the Certificate Principal Balance of the Class M-8 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 92.00% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $1,546,979.01.
The "Class M-9 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the distribution of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the distribution of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the distribution of the Class M-2
Principal Distribution Amount on such Distribution Date), (iv) the Certificate
Principal
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Balance of the Class M-3 Certificates (after taking into account the
distribution of the Class M-3 Principal Distribution Amount on such Distribution
Date), (v) the Certificate Principal Balance of the Class M-4 Certificates
(after taking into account the distribution of the Class M-4 Principal
Distribution Amount on such Distribution Date), (vi) the Certificate Principal
Balance of the Class M-5 Certificates (after taking into account the
distribution of the Class M-5 Principal Distribution Amount on such Distribution
Date), (vii) the Certificate Principal Balance of the Class M-6 Certificates
(after taking into account the distribution of the Class M-6 Principal
Distribution Amount on such Distribution Date), (viii) the Certificate Principal
Balance of the Class M-7 Certificates (after taking into account the
distribution of the Class M-7 Principal Distribution Amount on such Distribution
Date), (ix) the Certificate Principal Balance of the Class M-8 Certificates
(after taking into account the distribution of the Class M-8 Principal
Distribution Amount on such Distribution Date) and (x) the Certificate Principal
Balance of the Class M-9 Certificates immediately prior to such Distribution
Date over (y) the lesser of (A) the product of (i) 94.00% and (ii) the aggregate
Principal Balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) and (B)
the aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) minus $1,546,979.01.
The "Credit Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the aggregate Certificate Principal Balance
of the Subordinate Certificates by (y) the aggregate Principal Balance of the
Mortgage Loans calculated prior to taking into account distributions of
principal on the Mortgage Loans and distribution of the Principal Distribution
Amount to the holders of the Certificates then entitled to distributions of
principal on such Distribution Date.
A Mortgage Loan is "Delinquent" if any monthly payment due on a Due
Date is not made by the close of business on the next scheduled Due Date for
such Mortgage Loan. A Mortgage Loan is "30 days Delinquent" if such monthly
payment has not been received by the close of business on the corresponding day
of the month immediately succeeding the month in which such monthly payment was
due or, if there was no such corresponding day (e.g., as when a 30-day month
follows a 31-day month in which a payment was due on the 31st day of such
month), then on the last day of such immediately succeeding month; and similarly
for "60 days Delinquent" and "90 days Delinquent," etc.
The "Determination Date" with respect to any Distribution Date will be
the 15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day.
A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Extra Principal Distribution Amount" for any Distribution Date, is
the lesser of (x) the Net Monthly Excess Cashflow for such Distribution Date and
(y) the Overcollateralization Deficiency Amount for such Distribution Date.
"Insurance Proceeds" means the proceeds of any title policy, hazard
policy or other insurance policy covering a Mortgage Loan to the extent such
proceeds are not to be applied to the restoration of the related Mortgaged
Property or released to the mortgagor in accordance with the procedures that the
Servicer would follow in servicing mortgage loans held for its own account,
subject to the terms and conditions of the related mortgage note and Mortgage.
The "Interest Remittance Amount" with respect to any Distribution Date
is that portion of the Available Funds for such Distribution Date attributable
to interest received or advanced with respect to the Mortgage Loans.
The "Monthly Interest Distributable Amount" for any Distribution Date
and each class of Offered Certificates and the Class B Certificates equals the
amount of interest accrued during the related Accrual Period at the related
Pass- Through Rate on the Certificate Principal Balance of such class
immediately prior to such Distribution Date, in each case, reduced by any
Prepayment Interest Shortfalls allocated to such class and shortfalls resulting
from the application of
S-56
the Relief Act (allocated to each Certificate based on its respective
entitlements to interest irrespective of any Prepayment Interest Shortfalls or
shortfalls resulting from the application of the Relief Act for such
Distribution Date).
The "Net Monthly Excess Cashflow" for any Distribution Date is equal to
the sum of (a) any Overcollateralization Release Amount and (b) the excess of
(x) the Available Funds for such Distribution Date over (y) the sum for such
Distribution Date of (A) the Monthly Interest Distributable Amounts for the
Offered Certificates and the Class B Certificates, (B) the Unpaid Interest
Shortfall Amounts for the Class A Certificates and (C) the Principal Remittance
Amount.
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals the amount, if any, by which the Overcollateralization
Target Amount exceeds the Overcollateralized Amount on such Distribution Date
(assuming that 100% of the Principal Remittance Amount is applied as a principal
payment on such Distribution Date).
An "Overcollateralization Release Amount" means, with respect to any
Distribution Date, the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the excess, if any, of (i) the Overcollateralized
Amount for such Distribution Date (assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on such Distribution Date)
over (ii) the Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to any
Distribution Date (i) prior to the Stepdown Date, 1.00% of the aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date, (ii) on or after
the Stepdown Date provided a Trigger Event is not in effect, the greater of (A)
2.00% of the aggregate Principal Balance of the Mortgage Loans as of the last
day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (B) 0.50% of the aggregate Principal Balance of the Mortgage Loans
as of the Cut-off Date and (iii) on or after the Stepdown Date if a Trigger
Event is in effect, the Overcollateralization Target Amount for the immediately
preceding Distribution Date. Notwithstanding the foregoing, on and after any
Distribution Date following the reduction of the aggregate Certificate Principal
Balance of the Class A Certificates, the Mezzanine Certificates and the Class B
Certificates to zero, the Overcollateralization Target Amount will be zero.
The "Overcollateralized Amount" for any Distribution Date is an amount
equal to (i) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus (ii) the sum of the aggregate Certificate Principal Balance of the
Offered Certificates, the Class B Certificates and the Class P Certificates as
of such Distribution Date (after giving effect to distributions to be made on
such Distribution Date).
The "Prepayment Period" for any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Principal Distribution Amount" with respect to any Distribution
Date is the sum of (i) the Basic Principal Distribution Amount for such
Distribution Date and (ii) the Extra Principal Distribution Amount for such
Distribution Date.
The "Principal Remittance Amount" means with respect to any
Distribution Date, that portion of Available Funds equal to the sum of (i) all
scheduled payments of principal collected or advanced on the Mortgage Loans by
the Servicer that were due during the related Due Period, (ii) the principal
portion of all partial and full principal prepayments of the Mortgage Loans
applied by the Servicer during the related Prepayment Period, (iii) the
principal portion of all related Net Liquidation Proceeds, Insurance Proceeds
and Subsequent Recoveries received during the related Prepayment Period, (iv)
that portion of the Purchase Price, representing principal of any repurchased
Mortgage Loan, deposited to the Collection Account during the related Prepayment
Period, (v) the principal portion of any related Substitution Adjustments
deposited in the Collection Account during the related Prepayment Period and
(vi) on the Distribution Date on which the Trust is to be terminated in
accordance with the Pooling Agreement, that portion of the Termination Price
representing principal.
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"Realized Loss" means, with respect to any defaulted Mortgage Loan that
is finally liquidated (a "Liquidated Mortgage Loan"), the amount of loss
realized equal to the portion of the Principal Balance remaining unpaid after
application of all liquidation proceeds, insurance proceeds or condemnation
proceeds, net of amounts reimbursable to the Servicer for related Advances,
Servicing Advances and Servicing Fees (such amount, the "Net Liquidation
Proceeds") in respect of such Mortgage Loan.
The "Senior Principal Distribution Amount" is an amount equal to the
excess of (x) the aggregate Certificate Principal Balance of the Class A
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 63.00% and (ii) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus $1,546,979.01.
The "Stepdown Date" means the earlier to occur of (i) the first
Distribution Date on which the aggregate Certificate Principal Balance of the
Class A Certificates has been reduced to zero and (ii) the later to occur of (x)
the Distribution Date occurring in August 2007 and (y) the first Distribution
Date on which the Credit Enhancement Percentage (calculated for this purpose
only after taking into account distributions of principal on the Mortgage Loans
and distribution of the Principal Distribution Amount to the holders of the
Certificates then entitled to distributions of principal on such Distribution
Date) is greater than or equal to 37.00%.
"Subsequent Recoveries" are unanticipated amounts received on a
liquidated Mortgage Loan that resulted in a Realized Loss in a prior month. If
Subsequent Recoveries are received, they will be included (net of any amounts
due the Servicer) as part of the Principal Remittance Amount for the following
Distribution Date and distributed in accordance with the priorities described
herein. In addition, after giving effect to all distributions on a Distribution
Date, if any Allocated Realized Loss Amounts are outstanding, the Allocated
Realized Loss Amount for the class of Mezzanine Certificates or Class B
Certificates then outstanding with the highest distribution priority will be
decreased by the amount of such Subsequent Recoveries until reduced to zero
(with any remaining Subsequent Recoveries applied to reduce the Allocated
Realized Loss Amount of the class of Mezzanine Certificates or Class B
Certificates with the next highest distribution priority), and the Certificate
Principal Balance of such class or classes of Mezzanine Certificates or Class B
Certificates will be increased by the same amount. Thereafter, such class or
classes of Mezzanine Certificates or Class B Certificates will accrue interest
on the increased Certificate Principal Balance.
A "Trigger Event" is in effect with respect to any Distribution Date on
or after the Stepdown Date if:
(a) the sum of the percentages obtained by dividing (x) the aggregate
Principal Balance of Mortgage Loans Delinquent 60 days or more, that are in
foreclosure or that are REO Properties by (y) the aggregate Principal Balance of
the Mortgage Loans exceeds 42.00% of the Credit Enhancement Percentage; or
(b) the aggregate amount of Realized Losses incurred since the Cut-off
Date through the last day of the related Due Period (reduced by the aggregate
amount of Subsequent Recoveries received since the Cut-off Date through the last
day of the related Due Period) divided by the sum of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date exceeds the applicable
percentages set forth below with respect to such Distribution Date:
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
- ------------------------------ ---------------------------------------------
August 2007 through July 2008 3.00% for the first month, plus an additional
1/12th of 1.75% for each month thereafter.
August 2008 through July 2009 4.75% for the first month, plus an additional
1/12th of 1.50% for each month thereafter.
August 2009 through July 2010 6.25% for the first month, plus an additional
1/12th of 0.75% for each month thereafter.
August 2010 and thereafter 7.00% for each month.
S-58
The "Unpaid Interest Shortfall Amount" means (i) for each class of
Offered Certificates and the Class B Certificates and the first Distribution
Date, zero, and (ii) with respect to each class of Offered Certificates and the
Class B Certificates and any Distribution Date after the first Distribution
Date, the amount, if any, by which (a) the sum of (1) the Monthly Interest
Distributable Amount for such class for the immediately preceding Distribution
Date and (2) the outstanding Unpaid Interest Shortfall Amount, if any, for such
class for such preceding Distribution Date exceeds (b) the aggregate amount
distributed on such class in respect of interest pursuant to clause (a) of this
definition on such preceding Distribution Date, plus interest on the amount of
interest due but not paid on the Certificates of such class on such preceding
Distribution Date, to the extent permitted by law, at the Pass-Through Rate for
such class for the related Accrual Period.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to the
Offered Certificates and the Class B Certificates will equal the lesser of (a)
the related Formula Rate and (b) the related Net WAC Rate for such Distribution
Date. With respect to the Offered Certificates and the Class B Certificates,
interest in respect of any Distribution Date will accrue during the related
Accrual Period on the basis of a 360-day year and the actual number of days
elapsed.
The "Formula Rate" for the Offered Certificates and the Class B
Certificates is the lesser of (a) the Base Rate for such class or (b) the
related Maximum Cap Rate.
The "Base Rate" for the Offered Certificates and the Class B
Certificates is the sum of the interbank offered rate for one-month United
States dollar deposits in the London market (the "Certificate Index") as of the
related LIBOR Determination Date (as defined herein) plus a related margin (the
"Certificate Margin"). The Certificate Margin with respect to the Class A-1
Certificates on each Distribution Date on or prior to the Optional Termination
Date will equal 0.120% and on each Distribution Date after the Optional
Termination Date will equal 0.240%. The Certificate Margin with respect to the
Class A-2 Certificates on each Distribution Date on or prior to the Optional
Termination Date will equal 0.300% and on each Distribution Date after the
Optional Termination Date will equal 0.600%. The Certificate Margin with respect
to the Class A-3 Certificates on each Distribution Date on or prior to the
Optional Termination Date will equal 0.500% and on each Distribution Date after
the Optional Termination Date will equal 1.000%. The Certificate Margin with
respect to the Class M-1 Certificates on each Distribution Date on or prior to
the Optional Termination Date will equal 0.600% and on each Distribution Date
after the Optional Termination Date will equal 0.900%. The Certificate Margin
with respect to the Class M-2 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 0.650% and on each Distribution Date
after the Optional Termination Date will equal 0.975%. The Certificate Margin
with respect to the Class M-3 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 0.700% and on each Distribution Date
after the Optional Termination Date will equal 1.050%. The Certificate Margin
with respect to the Class M-4 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 1.100% and on each Distribution Date
after the Optional Termination Date will equal 1.650%. The Certificate Margin
with respect to the Class M-5 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 1.200% and on each Distribution Date
after the Optional Termination Date will equal 1.800%. The Certificate Margin
with respect to the Class M-6 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 1.400% and on each Distribution Date
after the Optional Termination Date will equal 2.100%. The Certificate Margin
with respect to the Class M-7 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 1.850% and on each Distribution Date
after the Optional Termination Date will equal 2.775%. The Certificate Margin
with respect to the Class M-8 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 2.000% and on each Distribution Date
after the Optional Termination Date will equal 3.000%. The Certificate Margin
with respect to the Class M-9 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 3.500% and on each Distribution Date
after the Optional Termination Date will equal 5.250%. The Certificate Margin
with respect to the Class B-1 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 3.500% and on each Distribution Date
after the Optional Termination Date will equal 5.250%. The Certificate Margin
with respect to the Class B-2 Certificates on each Distribution Date on or prior
to the Optional Termination Date will equal 3.500% and on each Distribution Date
after the Optional Termination Date will equal 5.250%.
S-59
The "Net WAC Rate" for any Distribution Date will be a per annum rate
(subject to adjustment based on the actual number of days elapsed in the related
Accrual Period) equal to the weighted average of the Adjusted Net Mortgage Rates
of the Mortgage Loans.
The "Adjusted Net Mortgage Rate" for any Mortgage Loan for any
Distribution Date will be a per annum rate equal to the applicable Mortgage Rate
for such Mortgage Loan as of the first day of the month preceding the month in
which such Distribution Date occurs minus the sum of (i) the Trustee Fee Rate
and (ii) the Servicing Fee Rate.
The "Maximum Cap Rate" for any Distribution Date is a per annum rate
(subject to adjustment based on the actual number of days elapsed in the related
Accrual Period) equal to the weighted average of the Adjusted Net Maximum
Mortgage Rates of the Mortgage Loans.
The "Adjusted Net Maximum Mortgage Rate" for any Mortgage Loan for any
Distribution Date will be a per annum rate equal to the applicable Maximum
Mortgage Rate for such Mortgage Loan (or the Mortgage Rate in the case of any
fixed-rate Mortgage Loan) as of the first day of the month preceding the month
in which such Distribution Date occurs minus the sum of (i) the Trustee Fee Rate
and (ii) the Servicing Fee Rate.
If on any Distribution Date, the Pass-Through Rate for a class of
Offered Certificates or the Class B Certificates is the Net WAC Rate, then the
"Net WAC Rate Carryover Amount" for such class for such Distribution Date is an
amount equal to the sum of (i) the excess of (x) the amount of interest such
class of Certificates would have accrued on such Distribution Date had such
Pass-Through Rate been the related Formula Rate, over (y) the amount of interest
such class of Certificates accrued for such Distribution Date at the Net WAC
Rate and (ii) the unpaid portion of any related Net WAC Rate Carryover Amount
from the prior Distribution Date together with interest accrued on such unpaid
portion for the most recently ended Accrual Period at the Formula Rate
applicable for such class for such Accrual Period. Any Net WAC Rate Carryover
Amount on the Offered Certificates and the Class B Certificates will be
distributed on such Distribution Date or future Distribution Dates from and to
the extent of funds available therefor in accordance with the priorities
described above under "Overcollateralization Provisions" after taking into
account any amounts received under the cap contract as described below.
On the Closing Date, the Trustee will establish an account (the "Net
WAC Rate Carryover Reserve Account") from which payments in respect of Net WAC
Rate Carryover Amounts on the Offered Certificates will be made. The Net WAC
Rate Carryover Reserve Account will be an asset of the Trust but not of any
REMIC. On each Distribution Date, to the extent required following the
distribution of Available Funds as described under "--Overcollateralization
Provisions" above and after deposit in the Net WAC Rate Carryover Reserve
Account of any payments received under the cap contract, the Trustee will
withdraw from amounts in the Net WAC Rate Carryover Reserve Account to
distribute to the Offered Certificates and the Class B Certificates any Net WAC
Rate Carryover Amounts in the following order of priority:
(i) concurrently, to each class of Class A Certificates, the related
Cap Amount, from payments made under the cap contract, in each case up to a
maximum amount equal to the related Net WAC Rate Carryover Amount for such
Distribution Date;
(ii) sequentially, to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class B-1 and Class B-2
Certificates, in that order, the related Cap Amount, from payments made under
the cap contract, in each case up to a maximum amount equal to the related Net
WAC Rate Carryover Amount for such Distribution Date;
(iii) concurrently, to each class of Class A Certificates, the related
Net WAC Rate Carryover Amount remaining undistributed pursuant to clause (i)
above, on a PRO RATA basis based on such respective remaining Net WAC Rate
Carryover Amounts; and
(iv) sequentially, to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class B-1 and Class B-2
Certificates, in that order, the related Net WAC Rate Carryover Amount remaining
undistributed pursuant to clause (ii) above.
S-60
The "Cap Amount" for the Offered Certificates and Class B Certificates
is equal to (i) the aggregate amount received by the Trust from the cap contract
multiplied by (ii) a fraction equal to (a) the Certificate Principal Balance of
such class immediately prior to the applicable Distribution Date divided by (b)
the aggregate Certificate Principal Balance of the Offered Certificates and the
Class B Certificates immediately prior to the applicable Distribution Date.
THE CAP CONTRACT
The Offered Certificates and the Class B Certificates will have the
benefit of an interest rate cap contract. Pursuant to the cap contract, WestLB
AG, New York Branch (together with any successor, the "Counterparty" or "Cap
Provider") will agree to pay to the Trust a monthly payment in an amount equal
to the product of: (1) for the Distribution Dates set forth below, the excess,
if any, of LIBOR over the rate set forth below for the related Distribution
Date, up to a maximum LIBOR of 10.00%; (2) the related notional amount set forth
below for the related Distribution Date; and (3) a fraction, the numerator of
which is the actual number of days elapsed from the previous Distribution Date
to but excluding the current Distribution Date (or, for the first Distribution
Date, the actual number of days elapsed from the Closing Date to but excluding
the first Distribution Date), and the denominator of which is 360.
NOTIONAL AMOUNT CAP STRIKE RATE
DISTRIBUTION DATE ($) (%)
August 2004........... 306,302,000.00 7.54404
September 2004........ 300,108,578.04 6.57261
October 2004.......... 293,895,676.60 6.79360
November 2004......... 287,661,063.02 6.57614
December 2004......... 281,403,512.45 6.80097
January 2005.......... 275,122,726.77 6.58291
February 2005......... 268,818,949.13 6.58405
March 2005............ 262,493,343.50 7.29055
April 2005............ 256,147,849.62 6.58580
May 2005.............. 249,785,164.20 6.80593
June 2005............. 243,409,329.28 6.59064
July 2005............. 237,192,589.20 6.81073
August 2005........... 231,131,776.66 6.59140
September 2005........ 225,222,986.06 6.59178
October 2005.......... 219,462,409.75 6.81190
November 2005......... 213,846,335.53 6.59253
December 2005......... 208,371,144.24 6.81664
January 2006.......... 203,033,375.75 6.59712
February 2006......... 197,829,518.60 6.59748
March 2006............ 192,756,219.10 7.30476
April 2006............ 187,810,207.65 6.59821
May 2006.............. 182,988,296.56 6.81853
June 2006............. 178,287,378.03 7.62771
July 2006............. 173,731,504.37 7.88166
August 2006........... 169,289,319.33 7.62630
September 2006........ 164,957,971.54 7.62518
October 2006.......... 160,734,700.84 7.87819
November 2006......... 156,616,815.85 7.62294
December 2006......... 152,601,692.30 8.40010
January 2007.......... 148,695,832.64 8.12778
February 2007......... 144,887,251.40 8.12602
March 2007............ 141,173,524.22 8.99472
April 2007............ 137,552,293.85 8.12251
May 2007.............. 134,021,261.68 8.39145
June 2007............. 130,578,186.28 8.85927
July 2007............. 127,232,467.99 9.16729
August 2007........... 123,970,162.62 8.86874
September 2007........ 121,405,163.27 8.86591
October 2007.......... 118,364,907.19 9.15852
November 2007......... 115,400,151.78 8.86025
(CONTINUED ON NEXT PAGE)
S-61
December 2007......... 112,509,026.90 9.75783
January 2008.......... 109,695,687.43 9.44559
February 2008......... 106,952,180.28 9.44206
March 2008............ 0.00 0.00000
April 2008............ 101,667,544.16 9.43501
May 2008.............. 99,123,092.89 9.74588
June 2008............. 0.00 0.00000
THE CAP COUNTERPARTY
WestLB AG is a joint stock company. Pursuant to a special law of the
State of North Rhine-Westphalia (the "Restructuring Law"), which became
effective on August 1, 2002, WestLB's public legal form was changed into a joint
stock company under German law (Article 1 section 8 Restructuring Law). All
branches, representative offices and foreign subsidiaries are maintained by
WestLB AG.
As of July 1, 2004 the ownership structure of WestLB AG is as follows:
NRW.BANK 70.68%, the Savings Banks and Giro Association of Westphalia-Lippe and
the Savings Banks and Giro Association of Rhineland (together, the
"Associations") 14.66% each. On June 29, 2004, the Annual General Meeting of
West LB AG endorsed a (U)1.5 billion capital increase, which will be contributed
in equal parts by each of the Associations and will be paid-in by the end of
September 2004. Following the capital increase becoming effective, the ownership
structure of WestLB AG will be as follows: NRW.BANK 38.75% and the Associations
30.625% each.
As of December 31, 2003, the WestLB AG Group (the "Group") had total
assets of approximately (U) 256.2 billion (US$320.2 billion).
Pursuant to a guaranty obligation (Gewahrtragerhaftung) set forth in
Section 39 of the North Rhine-Westphalia Savings Bank Act and Section 5 of the
Ordinances of Wesdeutsche Landesbank Girozentrale (currently known as WestLB
AG), the State of North Rhine-Westphalia together with the other guarantors
specified therein (including regional authorities and savings bank associations)
were jointly and severally liable without restriction for all obligations of the
former WestLB, including all obligations of WestLB New York. The guaranty
obligation gave creditors a direct claim against the State of North
Rhine-Westphalia only if the claims of the creditors have not first been
satisfied out of the assets of WestLB, including the assets of WestLB New York.
Pursuant to Article 1, Section 11 of the Restructuring Law, the owners
of NRW.Bank shall be liable for all obligations of WestLB AG (including all
obligations of WestLB AG, New York Branch) agreed by July 18, 2005. Liability
for those obligations agreed by July 18, 2001 shall be unlimited in time;
liability for those obligations agreed thereafter, but at the latest by July 18,
2005, shall only apply to obligations whose maturity does not go beyond December
31, 2015. According to the Restructuring Law the owners of NRW.Bank shall
immediately honor their obligations from Gewahrtragerhaftung vis-a-vis the
creditors of obligations agreed by July 18, 2005, as soon as they have stated,
when these liabilities come due, in due manner and in writing that the creditors
of these liabilities cannot be satisfied out of the assets of WestLB AG. Until
and including July 18, 2005, the owners of NRW.Bank will ensure that WestLB AG
is able to honor its obligations (Anstaltslast).
WestLB AG has a long-term debt rating of "Aa2" and a short-term debt
rating of "P-1" from Moody's, a long- term debt rating "AA" and a short-term
debt rating of "A-1+" from S&P.
THE NEW YORK BRANCH
The New York Branch of WestLB AG ("WestLB AG New York") is licensed and
subject to supervision and regulation by the Superintendent of Banks of the
State of New York. WestLB AG New York is examined by the New York State Banking
Department and is subject to banking laws and regulations applicable to a
foreign bank that operates a New York branch. In addition, WestLB AG and WestLB
AG New York are subject to the International Banking Act of 1978 (the "IBA") and
WestLB AG is subject to federal regulation under the IBA and the Bank Holding
Company Act of 1956.
S-62
For financial reports and other information about WestLB AG, please
contact WestLB AG, Investors Relations, Herzogstrasse 15, 40217 Dusseldorf.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Offered Certificates (each such
date, a "LIBOR Determination Date"), the Trustee will determine the Certificate
Index for such Accrual Period for the Offered Certificates on the basis of the
London interbank offered rate for one- month United States dollar deposits, as
such rates appear on the Telerate Page 3750, as of 11:00 a.m. (London time) on
such LIBOR Determination Date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined on the basis of the offered rates
of the Reference Banks (as defined herein) for one-month United States dollar
deposits, as of 11:00 a.m. (London time) on such LIBOR Determination Date. The
Trustee will request the principal London office of each of the Reference Banks
to provide a quotation of its rate. If on such LIBOR Determination Date two or
more Reference Banks provide such offered quotations, the Certificate Index for
the related Accrual Period will be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple of
0.0625%). If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, the Certificate Index for the related Accrual
Period will be the higher of (x) the Certificate Index as determined on the
previous LIBOR Determination Date and (y) the Reserve Interest Rate (as defined
herein).
As used in this section, "LIBOR Business Day" means a day on which
banks are open for dealing in foreign currency and exchange in London and New
York City; "Telerate Page 3750" means the display page currently so designated
on the Dow Jones Telerate Capital Markets Report (or such other page as may
replace that page on that service for the purpose of displaying comparable rates
or prices); "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) which have been
designated as such by the Trustee and (iii) not controlling, controlled by or
under common control with, the Servicer or any successor Servicer or the
Originator; and "Reserve Interest Rate" will be the rate per annum that the
Trustee determines to be either (i) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 0.0625%) of the one-month United
States dollar lending rates which New York City banks selected by the Trustee
are quoting on the relevant LIBOR Determination Date to the principal London
offices of leading banks in the London interbank market or (ii) in the event
that the Trustee can determine no such arithmetic mean, the lowest one-month
United States dollar lending rate which New York City banks selected by the
Trustee are quoting on such LIBOR Determination Date to leading European banks.
The establishment of the Certificate Index on each LIBOR Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Offered Certificates for the related Accrual Period will (in
the absence of manifest error) be final and binding.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will provide or make available
to each holder of a Certificate and the rating agencies a statement (based on
information received from the Servicer pursuant to the Pooling Agreement)
setting forth, among other things, the information set forth in the prospectus
under "Description of the Securities--Reports to Securityholders." The Trustee
will make the statement (and, at its option, any additional files containing the
same information in an alternative format) available each month via the
Trustee's internet website.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
S-63
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of an Offered Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity may be lower than that so calculated. In
general, the earlier a loss occurs, the greater is the effect on an investor's
yield to maturity. There can be no assurance as to the delinquency, foreclosure
or loss experience with respect to the Mortgage Loans. Because the Mortgage
Loans were underwritten in accordance with standards less stringent than those
generally acceptable to Fannie Mae and Freddie Mac with regard to a borrower's
credit standing and repayment ability, the risk of delinquencies with respect
to, and losses on, the Mortgage Loans will be greater than that of mortgage
loans underwritten in accordance with Fannie Mae and Freddie Mac standards.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be affected by the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Servicer). Because certain of the Mortgage Loans contain
prepayment charges, the rate of principal payments may be less than the rate of
principal payments for mortgage loans that do not have prepayment charges. The
Mortgage Loans are subject to the "due-on-sale" provisions included therein and
each Adjustable-Rate Mortgage Loan provides that the Mortgage Loan is assumable
by a creditworthy purchaser of the related Mortgaged Property. See "The Mortgage
Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans
(including any optional purchase) will result in distributions on the Offered
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of the Mortgage Loans. Since the rate of payment of principal on
the Mortgage Loans will depend on future events and a variety of other factors,
no assurance can be given as to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of a class of Offered Certificates may
vary from the anticipated yield will depend upon the degree to which such class
of Certificates is purchased at a discount or premium. Further, an investor
should consider the risk that, in the case of any Offered Certificate purchased
at a discount, a slower than anticipated rate of principal payments (including
prepayments) on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, a faster than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Rates on the
Mortgage Loans, such Mortgage Loans could be subject to higher prepayment rates
than if prevailing interest rates were to remain at or above the Mortgage Rates
on such Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. The Mortgage Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors with Adjustable-Rate Mortgage
Loans may be inclined to refinance their Adjustable-Rate Mortgage Loans with a
fixed-rate loan to "lock in" a lower interest rate or to refinance their
Adjustable- Rate Mortgage Loans with other more competitive adjustable-rate
mortgage loans. The existence of the applicable Periodic Rate Cap and Maximum
Mortgage Rate with respect to the Adjustable-Rate Mortgage Loans also may affect
the likelihood of prepayments resulting from refinancings. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. In addition, the delinquency and loss experience of
the fixed-rate Mortgage Loans may differ from that on the Adjustable-Rate
Mortgage Loans because the amount of the monthly payments on the Adjustable-Rate
Mortgage Loans are subject to adjustment on each Adjustment Date. Furthermore,
substantially all of the Adjustable-Rate Mortgage Loans will not have their
initial Adjustment Date for two or three years after the origination thereof.
The prepayment experience of the Delayed First Adjustment Mortgage Loans may
differ from that of the other Mortgage Loans. The Delayed First Adjustment
Mortgage Loans may be subject to greater rates of prepayments as they approach
their initial Adjustment Dates even if market interest rates
S-64
are only slightly higher or lower than the Mortgage Rates on the Delayed First
Adjustment Mortgage Loans as mortgagors seek to avoid changes in their monthly
payments.
Approximately 62.82% of the Mortgage Loans (by aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date) provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. The holders of the Class P Certificates will be entitled to all
prepayment charges received on the Mortgage Loans, and such amounts will not be
available for distribution on the other classes of Certificates. Under certain
circumstances, as described in the Pooling Agreement, the Servicer may waive the
payment of any otherwise applicable prepayment charge. Investors should conduct
their own analysis of the effect, if any, that the prepayment charges, and
decisions by the Servicer with respect to the waiver thereof, may have on the
prepayment performance of the Mortgage Loans. The Depositor makes no
representations as to the effect that the prepayment charges, and decisions by
the Servicer with respect to the waiver thereof, may have on the prepayment
performance of the Mortgage Loans.
YIELD CONSIDERATIONS RELATING TO INTEREST DISTRIBUTIONS
INTEREST MAY BE LIMITED BY THE NET WAC RATE. If the pass-through rate
of any class of Offered Certificates is limited by the Net WAC Rate, such class
will accrue less interest than would otherwise be the case.
To the extent the Pass-Through Rate for any class of Offered
Certificates on any Distribution Date is limited to the Net WAC Rate, a
shortfall in interest equal to the Net WAC Rate Carryover Amount will occur.
Such shortfall will only be distributable, from Net Monthly Excess Cashflow, to
the extent of any Net Monthly Excess Cashflow remaining after the distributions
set forth under (i) through (xxiii) under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement
and from payments received under the cap contract.
The Net WAC Rate for the Offered Certificates will be lower for Accrual
Periods that are longer than 30 days, and the Pass-Through Rates on the Offered
Certificates are more likely to be capped at the Net WAC Rate than they would if
all Accrual Periods were 30 days long. For a discussion of other factors that
could cause the Pass-Through Rate on the Offered Certificates to be capped at
the Net WAC Rate, see "Risk Factors--Effect of Mortgage Rates on the Offered
Certificates" in this prospectus supplement.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to the Offered Certificates with the Securities and
Exchange Commission (the "Commission") in a report on Form 8-K and may file
certain additional yield tables and other computational materials with respect
to the Offered Certificates with the Commission in a report on Form 8-K. Such
tables and materials were prepared by the Underwriters at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Such tables and assumptions
may be based on assumptions that differ from the Structuring Assumptions (as
defined herein). Accordingly, such tables and other materials may not be
relevant to or appropriate for investors other than those specifically
requesting them.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of an Offered Certificate is the average
amount of time that will elapse from the Closing Date, until each dollar of
principal is repaid to the investors in such Certificate. Because it is expected
that there
S-65
will be prepayments and defaults on the Mortgage Loans, the actual weighted
average lives of these Certificates are expected to vary substantially from the
weighted average remaining terms to stated maturity of the Mortgage Loans as set
forth herein under "The Mortgage Pool."
The Assumed Final Distribution Date for the Offered Certificates is as
set forth herein under "Description of the Certificates--General." The final
Distribution Date with respect to the Offered Certificates could occur
significantly earlier than the related Assumed Final Distribution Date because
(i) prepayments are likely to occur, (ii) excess cashflow, if any, will be
applied as principal of the Offered Certificates as described herein and (iii)
an early termination of the Trust may occur as provided herein.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate for the fixed-rate Mortgage
Loans of 115% of the Fixed-Rate Prepayment Vector and a prepayment rate for the
Adjustable-Rate Mortgage Loans of 27% CPR. A "Fixed-Rate Prepayment Vector"
assumes a constant prepayment rate ("CPR") of 4% per annum of the then unpaid
principal balance of such mortgage loans in the first month of the life of such
mortgage loans and an additional approximately 1.4545% (precisely 16%/11) per
annum in each month thereafter until the 12th month. Beginning in the 12th month
and in each month thereafter during the life of such mortgage loans, such
prepayment vector assumes a CPR of 20%. CPR is a prepayment assumption that
represents a constant assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. The model does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any mortgage loans,
including the Mortgage Loans to be included in the Trust.
Each of the Prepayment Scenarios in the table below assumes the
respective percentages of the Fixed-Rate Prepayment Vector or CPR described
thereunder.
The tables entitled "Percent of Original Certificate Principal Balance
Outstanding" were prepared on the basis of the assumptions in the following
paragraph and the table set forth below. There are certain differences between
the loan characteristics included in such assumptions and the characteristics of
the actual Mortgage Loans. Any such discrepancy may have an effect upon the
percentages of Original Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates set forth in the tables. In addition,
since the actual Mortgage Loans in the Trust will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the table.
The percentages and weighted average lives in the tables entitled
"Percent of Original Certificate Principal Balance Outstanding" were determined
assuming that (the "Structuring Assumptions"): (i) the Mortgage Loans have the
characteristics set forth in the table below entitled "Assumed Mortgage Loan
Characteristics," (ii) the closing date for the Offered Certificates occurs on
July 29, 2004 and the Offered Certificates were sold to investors on such date,
(iii) distributions on the Certificates are made on the 25th day of each month
regardless of the day on which the Distribution Date actually occurs, commencing
in August 2004, in accordance with the allocation of Available Funds set forth
above under "Description of the Certificates--Allocation of Available Funds,"
(iv) the prepayment rates are the percentages of the Fixed-Rate Prepayment
Vector or CPR set forth in the "Percent of Original Certificate Principal
Balance Outstanding" tables below, (v) prepayments include thirty days' interest
thereon, (vi) no party is required to substitute or repurchase any of the
Mortgage Loans pursuant to the Master Agreement or the Assignment Agreement and
no optional termination is exercised, except with respect to the entries
identified by the row captioned "Weighted Average Life (years) to Optional
Termination" in the tables below, (vii) the Overcollateralization Target Amount
is determined as set forth in this prospectus supplement, (viii) scheduled
payments for all Mortgage Loans are received on the first day of each month
commencing in August 2004 and the principal portion of such payments is computed
prior to giving effect to prepayments received in the previous month and there
are no losses or delinquencies with respect to such Mortgage Loans, (ix) all
related Mortgage Loans prepay at the same rate and all such payments are treated
as prepayments in full of individual Mortgage Loans, with no shortfalls in
collection of interest, (x) such prepayments are received on the last day of
each month commencing in the month of the Closing Date, (xi) the Certificate
Index is at all times equal to 1.36875%, (xii) the Pass-Through Rates for the
Offered Certificates and the Class B Certificates are as set forth herein,
(xiii) the Mortgage Rate for each Adjustable-Rate Mortgage Loan is adjusted on
its next Adjustment Date (and on
S-66
subsequent Adjustment Dates, if necessary) to equal the sum of (a) the assumed
level of Six-Month LIBOR and (b) the respective Gross Margin (such sum being
subject to the applicable Periodic Rate Caps, Minimum Mortgage Rates and Maximum
Mortgage Rates), (xiv) with respect to the Adjustable-Rate Mortgage Loans,
Six-Month LIBOR is equal to 1.89000% and (xv) the Trustee Fee Rate is equal to
0.0075% per annum and the Servicing Fee Rate for each Mortgage Loan is equal to
0.50% per annum. Nothing contained in the foregoing assumptions should be
construed as a representation that the Mortgage Loans will not experience
delinquencies or losses.
PREPAYMENT SCENARIOS(1)
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
Fixed-Rate Mortgage Loans: 50% 75% 100% 115% 150% 200% 250%
Adjustable-Rate Mortgage Loans: 12% 18% 24% 27% 36% 50% 60%
- --------------
(1) Percentage of the Fixed-Rate Prepayment Vector or CPR, as applicable.
S-67
ASSUMED MORTGAGE LOAN CHARACTERISTICS
REMAINING
ORIGINAL TERM TERM TO
PRINCIPAL MORTGAGE TO MATURITY MATURITY
DESCRIPTION BALANCE ($) RATE (%) (MONTHS) (MONTHS)
- --------------------------- -------------- ----------- ------------- ----------
Fixed-Rate Mortgage Loans:
43,758.29 7.62500 84 81
68,836.16 7.25000 60 59
5,994,197.12 8.06544 172 170
198,113.93 9.18598 165 163
16,523.54 10.99000 180 179
1,300,994.09 8.16253 174 172
218,515.13 6.25000 180 178
4,743,128.05 7.39933 175 173
9,686,195.57 9.63534 241 239
1,080,431.98 7.33210 254 252
621,644.52 10.70777 240 238
1,506,786.73 8.62013 247 245
5,935,236.58 8.48126 246 244
22,366,525.00 7.50941 360 358
4,748,943.67 7.34874 360 358
5,579,821.92 7.01936 360 358
11,303,423.78 6.68921 360 358
355,586.78 6.93633 360 357
1,201,499.04 6.67858 360 358
30,350,886.50 6.90850 360 358
2,363,818.70 10.53170 180(1) 178
228,830.81 9.38759 180(1) 179
238,218.29 9.77121 180(1) 178
278,291.41 9.95659 180(1) 179
310,832.43 10.14212 180(1) 178
- -------------------
(1) Balloon Mortgage Loan with original amortization terms of 360 months.
(CONTINUED ON NEXT PAGE)
S-68
ORIGINAL REMAINING MAXIMUM MINIMUM MONTHS TO INITIAL
INITIAL TERM TO TERM TO GROSS MORTGAGE MORTGAGE NEXT PERIODIC PERIODIC
PRINCIPAL MORTGAGE MATURITY MATURITY MARGIN RATE RATE ADJUSTMENT RATE CAP RATE CAP
DESCRIPTION BALANCE ($) RATE (%) (MONTHS) (MONTHS) (%) (%) (%) DATE (%) (%)
- ----------- --------- -------- -------- -------- ------ -------- -------- ---------- -------- --------
Adjustable-Rate Mortgage Loans:
67,364,249.53 7.46205 360 358 7.75183 14.44725 7.46029 22 2.06659 1.03178
3,536,527.25 6.60963 360 358 6.91329 13.60963 6.60963 22 2.29186 1.14593
46,290,069.53 6.92777 360 358 7.20416 13.88026 6.92777 22 2.16665 1.05928
12,391,818.20 7.09804 360 358 7.35006 14.09079 7.09804 22 2.11314 1.02653
226,651.30 7.74950 360 358 8.04404 14.74950 7.74950 22 2.00000 1.00000
139,555.92 7.65000 360 359 8.00000 14.65000 7.65000 23 2.00000 1.00000
37,146,839.70 7.12265 360 358 7.41294 14.12265 7.12265 22 2.00162 1.00081
6,255,931.47 6.60244 360 358 6.77506 13.43848 6.60244 34 2.82109 1.09593
920,454.12 6.72549 360 358 7.04186 13.72549 6.72549 34 3.00000 1.04912
1,792,668.62 6.03602 360 359 6.34429 13.03602 6.03602 35 2.87978 1.11951
19,078,909.94 6.78784 360 358 7.07350 13.75004 6.78784 34 2.91704 1.06412
2,221,367.76 6.33609 360 358 6.62930 13.33609 6.33609 34 2.89671 1.00000
952,005.39 9.05742 343 341 9.85463 16.05742 9.05742 4 1.00000 1.00000
337,713.17 9.34686 360 358 1 0.19686 16.34686 9.34686 4 1.00000 1.00000
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of the Offered Certificates, and set forth the
percentages of the Original Certificate Principal Balance of such Certificate
that would be outstanding after each of the dates shown, at various percentages
of the Fixed-Rate Prepayment Vector or CPR, as applicable.
S-69
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS A-1
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
----------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage.............. 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................... 56 36 16 6 0 0 0
July 25, 2006................... 14 0 0 0 0 0 0
July 25, 2007................... 0 0 0 0 0 0 0
July 25, 2008................... 0 0 0 0 0 0 0
July 25, 2009................... 0 0 0 0 0 0 0
July 25, 2010................... 0 0 0 0 0 0 0
July 25, 2011................... 0 0 0 0 0 0 0
July 25, 2012................... 0 0 0 0 0 0 0
July 25, 2013................... 0 0 0 0 0 0 0
July 25, 2014................... 0 0 0 0 0 0 0
July 25, 2015................... 0 0 0 0 0 0 0
July 25, 2016................... 0 0 0 0 0 0 0
July 25, 2017................... 0 0 0 0 0 0 0
July 25, 2018................... 0 0 0 0 0 0 0
July 25, 2019................... 0 0 0 0 0 0 0
July 25, 2020................... 0 0 0 0 0 0 0
July 25, 2021................... 0 0 0 0 0 0 0
July 25, 2022................... 0 0 0 0 0 0 0
July 25, 2023................... 0 0 0 0 0 0 0
July 25, 2024................... 0 0 0 0 0 0 0
July 25, 2025................... 0 0 0 0 0 0 0
July 25, 2026................... 0 0 0 0 0 0 0
July 25, 2027................... 0 0 0 0 0 0 0
July 25, 2028................... 0 0 0 0 0 0 0
July 25, 2029................... 0 0 0 0 0 0 0
July 25, 2030................... 0 0 0 0 0 0 0
July 25, 2031................... 0 0 0 0 0 0 0
July 25, 2032................... 0 0 0 0 0 0 0
July 25, 2033................... 0 0 0 0 0 0 0
July 25, 2034................... 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1).................. 1.18 0.82 0.63 0.56 0.43 0.30 0.24
Weighted Average Life (years)
to Optional Termination(1)(2)... 1.18 0.82 0.63 0.56 0.43 0.30 0.24
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-70
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS A-2
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 87 61 41
July 25, 2006................ 100 88 69 59 35 3 0
July 25, 2007................ 87 61 38 27 1 0 0
July 25, 2008................ 68 41 26 19 1 0 0
July 25, 2009................ 51 30 15 8 0 0 0
July 25, 2010................ 40 20 6 0 0 0 0
July 25, 2011................ 32 12 0 0 0 0 0
July 25, 2012................ 25 6 0 0 0 0 0
July 25, 2013................ 19 * 0 0 0 0 0
July 25, 2014................ 13 0 0 0 0 0 0
July 25, 2015................ 8 0 0 0 0 0 0
July 25, 2016................ 4 0 0 0 0 0 0
July 25, 2017................ * 0 0 0 0 0 0
July 25, 2018................ 0 0 0 0 0 0 0
July 25, 2019................ 0 0 0 0 0 0 0
July 25, 2020................ 0 0 0 0 0 0 0
July 25, 2021................ 0 0 0 0 0 0 0
July 25, 2022................ 0 0 0 0 0 0 0
July 25, 2023................ 0 0 0 0 0 0 0
July 25, 2024................ 0 0 0 0 0 0 0
July 25, 2025................ 0 0 0 0 0 0 0
July 25, 2026................ 0 0 0 0 0 0 0
July 25, 2027................ 0 0 0 0 0 0 0
July 25, 2028................ 0 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 6.02 4.12 3.08 2.67 1.79 1.24 0.97
Weighted Average Life (years)
to Optional Termination(1)(2) 6.02 4.12 3.08 2.67 1.79 1.24 0.97
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-71
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS A-3
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 23
July 25, 2007................ 100 100 100 100 100 0 0
July 25, 2008................ 100 100 100 100 100 0 0
July 25, 2009................ 100 100 100 100 77 0 0
July 25, 2010................ 100 100 100 99 51 0 0
July 25, 2011................ 100 100 95 73 33 0 0
July 25, 2012................ 100 100 73 53 22 0 0
July 25, 2013................ 100 100 55 39 14 0 0
July 25, 2014................ 100 83 42 28 9 0 0
July 25, 2015................ 100 67 32 21 5 0 0
July 25, 2016................ 100 54 24 15 2 0 0
July 25, 2017................ 100 43 18 11 0 0 0
July 25, 2018................ 86 35 13 7 0 0 0
July 25, 2019................ 72 27 10 4 0 0 0
July 25, 2020................ 61 22 7 1 0 0 0
July 25, 2021................ 52 17 4 0 0 0 0
July 25, 2022................ 44 14 1 0 0 0 0
July 25, 2023................ 36 11 0 0 0 0 0
July 25, 2024................ 30 8 0 0 0 0 0
July 25, 2025................ 25 5 0 0 0 0 0
July 25, 2026................ 20 3 0 0 0 0 0
July 25, 2027................ 16 1 0 0 0 0 0
July 25, 2028................ 13 0 0 0 0 0 0
July 25, 2029................ 10 0 0 0 0 0 0
July 25, 2030................ 6 0 0 0 0 0 0
July 25, 2031................ 3 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 18.26 13.41 10.26 9.02 6.67 2.45 1.89
Weighted Average Life (years)
to Optional Termination(1)(2) 15.44 10.99 8.28 7.24 5.33 2.45 1.89
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-72
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-1
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 90 93
July 25, 2008................ 100 92 70 60 80 90 92
July 25, 2009................ 100 76 54 44 25 90 42
July 25, 2010................ 91 62 41 33 17 59 12
July 25, 2011................ 79 51 31 24 11 31 0
July 25, 2012................ 69 41 24 18 7 10 0
July 25, 2013................ 60 34 18 13 5 0 0
July 25, 2014................ 52 27 14 9 2 0 0
July 25, 2015................ 45 22 10 7 0 0 0
July 25, 2016................ 39 18 8 5 0 0 0
July 25, 2017................ 33 14 6 4 0 0 0
July 25, 2018................ 28 11 4 0 0 0 0
July 25, 2019................ 24 9 3 0 0 0 0
July 25, 2020................ 20 7 0 0 0 0 0
July 25, 2021................ 17 6 0 0 0 0 0
July 25, 2022................ 14 4 0 0 0 0 0
July 25, 2023................ 12 3 0 0 0 0 0
July 25, 2024................ 10 0 0 0 0 0 0
July 25, 2025................ 8 0 0 0 0 0 0
July 25, 2026................ 7 0 0 0 0 0 0
July 25, 2027................ 5 0 0 0 0 0 0
July 25, 2028................ 4 0 0 0 0 0 0
July 25, 2029................ 3 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years) to
Maturity(1).................. 11.75 8.33 6.33 5.68 4.92 6.28 4.83
Weighted Average Life (years) to
Optional Termination(1)(2)... 10.86 7.58 5.72 5.13 4.51 3.72 2.85
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-73
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-2
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 100 100
July 25, 2008................ 100 92 70 60 39 100 8
July 25, 2009................ 100 76 54 44 25 29 3
July 25, 2010................ 91 62 41 33 17 5 0
July 25, 2011................ 79 51 31 24 11 0 0
July 25, 2012................ 69 41 24 18 7 0 0
July 25, 2013................ 60 34 18 13 5 0 0
July 25, 2014................ 52 27 14 9 0 0 0
July 25, 2015................ 45 22 10 7 0 0 0
July 25, 2016................ 39 18 8 5 0 0 0
July 25, 2017................ 33 14 6 2 0 0 0
July 25, 2018................ 28 11 4 0 0 0 0
July 25, 2019................ 24 9 0 0 0 0 0
July 25, 2020................ 20 7 0 0 0 0 0
July 25, 2021................ 17 6 0 0 0 0 0
July 25, 2022................ 14 4 0 0 0 0 0
July 25, 2023................ 12 1 0 0 0 0 0
July 25, 2024................ 10 0 0 0 0 0 0
July 25, 2025................ 8 0 0 0 0 0 0
July 25, 2026................ 7 0 0 0 0 0 0
July 25, 2027................ 5 0 0 0 0 0 0
July 25, 2028................ 4 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 11.72 8.30 6.30 5.63 4.72 4.89 3.70
Weighted Average Life (years)
to Optional Termination(1)(2) 10.86 7.58 5.71 5.10 4.33 3.82 2.91
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-74
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-3
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 100 86
July 25, 2008................ 100 92 70 60 39 74 8
July 25, 2009................ 100 76 54 44 25 10 0
July 25, 2010................ 91 62 41 33 17 5 0
July 25, 2011................ 79 51 31 24 11 0 0
July 25, 2012................ 69 41 24 18 7 0 0
July 25, 2013................ 60 34 18 13 5 0 0
July 25, 2014................ 52 27 14 9 0 0 0
July 25, 2015................ 45 22 10 7 0 0 0
July 25, 2016................ 39 18 8 5 0 0 0
July 25, 2017................ 33 14 6 0 0 0 0
July 25, 2018................ 28 11 3 0 0 0 0
July 25, 2019................ 24 9 0 0 0 0 0
July 25, 2020................ 20 7 0 0 0 0 0
July 25, 2021................ 17 6 0 0 0 0 0
July 25, 2022................ 14 3 0 0 0 0 0
July 25, 2023................ 12 0 0 0 0 0 0
July 25, 2024................ 10 0 0 0 0 0 0
July 25, 2025................ 8 0 0 0 0 0 0
July 25, 2026................ 7 0 0 0 0 0 0
July 25, 2027................ 5 0 0 0 0 0 0
July 25, 2028................ 1 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 11.70 8.27 6.28 5.59 4.60 4.32 3.28
Weighted Average Life (years)
to Optional Termination(1)(2) 10.86 7.58 5.71 5.08 4.22 3.82 2.91
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-75
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-4
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ---------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 100 19
July 25, 2008................ 100 92 70 60 39 18 8
July 25, 2009................ 100 76 54 44 25 10 0
July 25, 2010................ 91 62 41 33 17 5 0
July 25, 2011................ 79 51 31 24 11 0 0
July 25, 2012................ 69 41 24 18 7 0 0
July 25, 2013................ 60 34 18 13 * 0 0
July 25, 2014................ 52 27 14 9 0 0 0
July 25, 2015................ 45 22 10 7 0 0 0
July 25, 2016................ 39 18 8 2 0 0 0
July 25, 2017................ 33 14 6 0 0 0 0
July 25, 2018................ 28 11 0 0 0 0 0
July 25, 2019................ 24 9 0 0 0 0 0
July 25, 2020................ 20 7 0 0 0 0 0
July 25, 2021................ 17 6 0 0 0 0 0
July 25, 2022................ 14 0 0 0 0 0 0
July 25, 2023................ 12 0 0 0 0 0 0
July 25, 2024................ 10 0 0 0 0 0 0
July 25, 2025................ 8 0 0 0 0 0 0
July 25, 2026................ 7 0 0 0 0 0 0
July 25, 2027................ 4 0 0 0 0 0 0
July 25, 2028................ 0 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 11.66 8.24 6.25 5.56 4.52 4.06 3.09
Weighted Average Life (years)
to Optional Termination(1)(2) 10.86 7.58 5.71 5.08 4.16 3.79 2.88
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-76
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-5
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 100 19
July 25, 2008................ 100 92 70 60 39 18 8
July 25, 2009................ 100 76 54 44 25 10 0
July 25, 2010................ 91 62 41 33 17 0 0
July 25, 2011................ 79 51 31 24 11 0 0
July 25, 2012................ 69 41 24 18 7 0 0
July 25, 2013................ 60 34 18 13 0 0 0
July 25, 2014................ 52 27 14 9 0 0 0
July 25, 2015................ 45 22 10 7 0 0 0
July 25, 2016................ 39 18 8 0 0 0 0
July 25, 2017................ 33 14 3 0 0 0 0
July 25, 2018................ 28 11 0 0 0 0 0
July 25, 2019................ 24 9 0 0 0 0 0
July 25, 2020................ 20 7 0 0 0 0 0
July 25, 2021................ 17 1 0 0 0 0 0
July 25, 2022................ 14 0 0 0 0 0 0
July 25, 2023................ 12 0 0 0 0 0 0
July 25, 2024................ 10 0 0 0 0 0 0
July 25, 2025................ 8 0 0 0 0 0 0
July 25, 2026................ 7 0 0 0 0 0 0
July 25, 2027................ 0 0 0 0 0 0 0
July 25, 2028................ 0 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 11.63 8.21 6.21 5.52 4.46 3.87 2.96
Weighted Average Life (years)
to Optional Termination(1)(2) 10.86 7.58 5.71 5.07 4.12 3.63 2.77
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-77
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-6
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 100 19
July 25, 2008................ 100 92 70 60 39 18 8
July 25, 2009................ 100 76 54 44 25 10 0
July 25, 2010................ 91 62 41 33 17 0 0
July 25, 2011................ 79 51 31 24 11 0 0
July 25, 2012................ 69 41 24 18 4 0 0
July 25, 2013................ 60 34 18 13 0 0 0
July 25, 2014................ 52 27 14 9 0 0 0
July 25, 2015................ 45 22 10 2 0 0 0
July 25, 2016................ 39 18 7 0 0 0 0
July 25, 2017................ 33 14 0 0 0 0 0
July 25, 2018................ 28 11 0 0 0 0 0
July 25, 2019................ 24 9 0 0 0 0 0
July 25, 2020................ 20 4 0 0 0 0 0
July 25, 2021................ 17 0 0 0 0 0 0
July 25, 2022................ 14 0 0 0 0 0 0
July 25, 2023................ 12 0 0 0 0 0 0
July 25, 2024................ 10 0 0 0 0 0 0
July 25, 2025................ 8 0 0 0 0 0 0
July 25, 2026................ 1 0 0 0 0 0 0
July 25, 2027................ 0 0 0 0 0 0 0
July 25, 2028................ 0 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 11.57 8.15 6.17 5.48 4.39 3.72 2.85
Weighted Average Life (years)
to Optional Termination(1)(2) 10.86 7.58 5.71 5.07 4.08 3.51 2.68
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-78
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-7
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 100 19
July 25, 2008................ 100 92 70 60 39 18 2
July 25, 2009................ 100 76 54 44 25 9 0
July 25, 2010................ 91 62 41 33 17 0 0
July 25, 2011................ 79 51 31 24 11 0 0
July 25, 2012................ 69 41 24 18 0 0 0
July 25, 2013................ 60 34 18 13 0 0 0
July 25, 2014................ 52 27 14 7 0 0 0
July 25, 2015................ 45 22 10 0 0 0 0
July 25, 2016................ 39 18 0 0 0 0 0
July 25, 2017................ 33 14 0 0 0 0 0
July 25, 2018................ 28 11 0 0 0 0 0
July 25, 2019................ 24 5 0 0 0 0 0
July 25, 2020................ 20 0 0 0 0 0 0
July 25, 2021................ 17 0 0 0 0 0 0
July 25, 2022................ 14 0 0 0 0 0 0
July 25, 2023................ 12 0 0 0 0 0 0
July 25, 2024................ 10 0 0 0 0 0 0
July 25, 2025................ 1 0 0 0 0 0 0
July 25, 2026................ 0 0 0 0 0 0 0
July 25, 2027................ 0 0 0 0 0 0 0
July 25, 2028................ 0 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 11.48 8.08 6.11 5.43 4.31 3.60 2.75
Weighted Average Life (years)
to Optional Termination(1)(2) 10.86 7.58 5.70 5.06 4.04 3.41 2.60
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-79
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-8
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ----------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 100 19
July 25, 2008................ 100 92 70 60 39 18 0
July 25, 2009................ 100 76 54 44 25 0 0
July 25, 2010................ 91 62 41 33 17 0 0
July 25, 2011................ 79 51 31 24 5 0 0
July 25, 2012................ 69 41 24 18 0 0 0
July 25, 2013................ 60 34 18 13 0 0 0
July 25, 2014................ 52 27 14 0 0 0 0
July 25, 2015................ 45 22 3 0 0 0 0
July 25, 2016................ 39 18 0 0 0 0 0
July 25, 2017................ 33 14 0 0 0 0 0
July 25, 2018................ 28 7 0 0 0 0 0
July 25, 2019................ 24 0 0 0 0 0 0
July 25, 2020................ 20 0 0 0 0 0 0
July 25, 2021................ 17 0 0 0 0 0 0
July 25, 2022................ 14 0 0 0 0 0 0
July 25, 2023................ 10 0 0 0 0 0 0
July 25, 2024................ 0 0 0 0 0 0 0
July 25, 2025................ 0 0 0 0 0 0 0
July 25, 2026................ 0 0 0 0 0 0 0
July 25, 2027................ 0 0 0 0 0 0 0
July 25, 2028................ 0 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 11.36 7.99 6.03 5.34 4.24 3.49 2.67
Weighted Average Life (years)
to Optional Termination(1)(2) 10.86 7.58 5.70 5.05 4.03 3.34 2.55
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-80
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
CLASS M-9
PREPAYMENT SCENARIO
---------------------------------------------------------------------------------------------
DISTRIBUTION DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
----------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Initial Percentage........... 100% 100% 100% 100% 100% 100% 100%
July 25, 2005................ 100 100 100 100 100 100 100
July 25, 2006................ 100 100 100 100 100 100 100
July 25, 2007................ 100 100 100 100 100 100 19
July 25, 2008................ 100 92 70 60 39 18 0
July 25, 2009................ 100 76 54 44 25 0 0
July 25, 2010................ 91 62 41 33 17 0 0
July 25, 2011................ 79 51 31 24 0 0 0
July 25, 2012................ 69 41 24 18 0 0 0
July 25, 2013................ 60 34 18 1 0 0 0
July 25, 2014................ 52 27 5 0 0 0 0
July 25, 2015................ 45 22 0 0 0 0 0
July 25, 2016................ 39 18 0 0 0 0 0
July 25, 2017................ 33 7 0 0 0 0 0
July 25, 2018................ 28 0 0 0 0 0 0
July 25, 2019................ 24 0 0 0 0 0 0
July 25, 2020................ 20 0 0 0 0 0 0
July 25, 2021................ 17 0 0 0 0 0 0
July 25, 2022................ 7 0 0 0 0 0 0
July 25, 2023................ 0 0 0 0 0 0 0
July 25, 2024................ 0 0 0 0 0 0 0
July 25, 2025................ 0 0 0 0 0 0 0
July 25, 2026................ 0 0 0 0 0 0 0
July 25, 2027................ 0 0 0 0 0 0 0
July 25, 2028................ 0 0 0 0 0 0 0
July 25, 2029................ 0 0 0 0 0 0 0
July 25, 2030................ 0 0 0 0 0 0 0
July 25, 2031................ 0 0 0 0 0 0 0
July 25, 2032................ 0 0 0 0 0 0 0
July 25, 2033................ 0 0 0 0 0 0 0
July 25, 2034................ 0 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)............... 11.19 7.84 5.91 5.24 4.14 3.38 2.59
Weighted Average Life (years)
to Optional Termination(1)(2) 10.86 7.58 5.70 5.05 4.00 3.28 2.51
- -------------------------
* If applicable, represents less than one-half of one percent.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reductions in the
Certificate Principal Balance of such class of Certificates.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-81
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class C Certificates, the
Class B Certificates and each class of Mezzanine Certificates with a lower
payment priority have been reduced to zero, the yield to maturity on any
remaining classes of Mezzanine Certificates will become extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow), will be allocated to those
Certificates. The initial undivided interests in the Trust evidenced by the
Class M-1 Certificates, the Class M-2 Certificates, the Class M-3 Certificates,
the Class M-4 Certificates, the Class M-5 Certificates, the Class M-6
Certificates, the Class M-7 Certificates, the Class M-8 Certificates, the Class
M-9 Certificates, the Class B-1 Certificates, the Class B-2 Certificates and the
Class C Certificates are approximately 3.15%, approximately 2.85%, approximately
1.80%, approximately 1.55%, approximately 1.45%, approximately 1.45%,
approximately 1.20%, approximately 1.05%, approximately 1.00%, approximately
1.00%, approximately 1.00% and approximately 1.00%, respectively. Investors in
the Mezzanine Certificates should fully consider the risk that Realized Losses
on the Mortgage Loans could result in the failure of such investors to fully
recover their investments. In addition, once Realized Losses have been allocated
to the Mezzanine Certificates, such amounts with respect to such Certificates
will no longer accrue interest and will not be reinstated thereafter (except in
the case of Subsequent Recoveries). However, Allocated Realized Loss Amounts may
be paid to the holders of the Mezzanine Certificates from Net Monthly Excess
Cashflow in the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
Unless the Certificate Principal Balance of the Class A Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until the Stepdown Date or during any period in which a
Trigger Event is in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a PRO RATA basis among the Offered
Certificates. As a result of the longer weighted average lives of the Mezzanine
Certificates, the holders of such Certificates have a greater risk of suffering
a loss on their investments. Further, because a Trigger Event may be based on
delinquencies, it is possible for the Mezzanine Certificates to receive no
principal distributions (unless the Certificate Principal Balance of the Class A
Certificates has been reduced to zero) on and after the Stepdown Date even if no
losses have occurred on the Mortgage Pool. For additional considerations
relating to the yield on the Mezzanine Certificates, see "Yield and Prepayment
Considerations" in the prospectus.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans transferred to the Trust.
FEDERAL INCOME TAX CONSEQUENCES
One or more elections will be made to treat designated portions of the
Trust (exclusive of the Net WAC Rate Carryover Reserve Account and the cap
contract) as a real estate mortgage investment conduit (a "REMIC") for federal
income tax purposes. Upon the issuance of the Offered Certificates, Thacher
Proffitt & Wood LLP, counsel to the Depositor, will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
Pooling Agreement, for federal income tax purposes, each REMIC elected by the
Trust will qualify as a REMIC under Sections 860A through 860G of the Internal
Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the Trust and (ii) the Offered Certificates
and the Class B Certificates (exclusive of any right of the holder of such
Certificates to receive payments from the Net WAC Rate Carryover Reserve Account
in respect of the Net WAC Rate Carryover Amount), the Class C Certificates and
the Class P Certificates will represent the "regular interests" in, and which
generally will be treated as debt instruments of, a REMIC. See "Certain Material
Federal Income Tax Considerations--General" in the prospectus.
Each holder of an Offered Certificate and a Class B Certificate is
deemed to own an undivided beneficial ownership interest in a REMIC regular
interest and the right to receive payments from the Net WAC Rate Carryover
S-82
Reserve Account in respect of the Net WAC Rate Carryover Amount. The Net WAC
Rate Carryover Reserve Account is not an asset of any REMIC. The treatment of
amounts received by a holder of an Offered Certificate and a Class B Certificate
under such Certificateholder's right to receive the Net WAC Rate Carryover
Amount will depend on the portion, if any, of such Certificateholder's purchase
price allocable thereto. Under the REMIC Regulations, each holder of an Offered
Certificate and a Class B Certificate must allocate its purchase price for the
Offered Certificate or Class B Certificate between its undivided interest in the
regular interest of the related REMIC and its undivided interest in the right to
receive payments from the Net WAC Rate Carryover Reserve Account in respect of
the Net WAC Rate Carryover Amount in accordance with the relative fair market
values of each property right. The Trust intends to treat payments made to the
holders of the Offered Certificates and Class B Certificates with respect to the
Net WAC Rate Carryover Amount as includible in income based on the regulations
relating to notional principal contracts (the "Notional Principal Contract
Regulations"). The OID Regulations provide that the Trust's allocation of the
issue price is binding on all holders unless the holder explicitly discloses on
its tax return that its allocation is different from the Trust's allocation. For
tax reporting purposes, the right to receive payments from the Net WAC Rate
Carryover Reserve Account in respect of Net WAC Rate Carryover Amounts may have
more than a DE MINIMIS value. The value of such amount may be obtained from the
Trustee upon request to the extent it has been provided to the Trustee by the
Underwriters. Under the REMIC Regulations, the Trust is required to account for
the REMIC regular interest and the right to receive payments from the Net WAC
Rate Carryover Reserve Account in respect of the Net WAC Rate Carryover Amount
as discrete property rights. Holders of the Offered Certificates and Class B
Certificates are advised to consult their own tax advisors regarding the
allocation of issue price, timing, character and source of income and deductions
resulting from the ownership of such Certificates. Treasury regulations have
been promulgated under Section 1275 of the Code generally providing for the
integration of a "qualifying debt instrument" with a hedge if the combined cash
flows of the components are substantially equivalent to the cash flows on a
variable rate debt instrument. However, such regulations specifically disallow
integration of debt instruments subject to Section 1272(a)(6) of the Code.
Therefore, holders of the Offered Certificates and Class B Certificates will be
unable to use the integration method provided for under such regulations with
respect to those Certificates. If the Trust's treatment of payments of the Net
WAC Rate Carryover Amount is respected, ownership of the right to the Net WAC
Rate Carryover Amount will entitle the owner to amortize the separate price paid
for the right to the Net WAC Rate Carryover Amount under the Notional Principal
Contract Regulations.
Upon the sale of an Offered Certificate or a Class B Certificate the
amount of the sale allocated to the selling Certificateholder's right to receive
payments from the Net WAC Rate Carryover Reserve Account in respect of the Net
WAC Rate Carryover Amount would be considered a "termination payment" under the
Notional Principal Contract Regulations allocable to the related Offered
Certificate or Class B Certificate, as the case may be. A holder of an Offered
Certificate or Class B Certificate will have gain or loss from such a
termination of the right to receive payments from the Net WAC Rate Carryover
Reserve Account in respect of the Net WAC Rate Carryover Amount equal to (i) any
termination payment it received or is deemed to have received minus (ii) the
unamortized portion of any amount paid (or deemed paid) by the Certificateholder
upon entering into or acquiring its interest in the right to receive payments
from the Net WAC Rate Carryover Reserve Account in respect of the Net WAC Rate
Carryover Amount. Gain or loss realized upon the termination of the right to
receive payments from the Net WAC Rate Carryover Reserve Account in respect of
the Net WAC Rate Carryover Amount will generally be treated as capital gain or
loss. Moreover, in the case of a bank or thrift institution, Code Section 582(c)
would likely not apply to treat such gain or loss as ordinary.
For federal income tax reporting purposes, the Class M-9 Certificates
will, the Class A-2 and Class A-3 Certificates will not and all remaining
classes of Offered Certificates may be issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at the Prepayment Assumption. No
representation is made that the Mortgage Loans will prepay at such rate or at
any other rate. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities" in the prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. In addition, there is
S-83
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Offered Certificates. Because of the uncertainty concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Offered Certificates
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers of
the Offered Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Offered Certificates, if such Certificates are
required to be treated as issued with original issue discount, generally would
be to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by assuming
that the value of the applicable index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on, such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities " in the prospectus.
Certain of the Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a Certificate
will be treated as holding such Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of such Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Certain Material Federal Income Tax Considerations--Taxation of
Debt Securities" in the prospectus.
With respect to the Offered Certificates and the Class B Certificates,
this paragraph is relevant to such Certificates exclusive of the rights of the
holders of such Certificates to receive certain payments in respect of the Net
WAC Rate Carryover Amount. The Offered Certificates will be treated as assets
described in Section 7701(a)(19)(C) of the Code and "real estate assets" under
Section 856(c)(4)(A) of the Code, generally in the same proportion that the
assets in the Trust would be so treated. In addition, interest on the Offered
Certificates will be treated as "interest on obligations secured by mortgages on
real property" under Section 856(c)(3)(B) of the Code, generally to the extent
that the Offered Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. The Offered Certificates will also be treated as
"qualified mortgages" under Section 860G(a)(3) of the Code. See "Certain
Material Federal Income Tax Considerations--Taxation of Debt Securities--Status
as Real Property Loans" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting. As noted above, each holder of an Offered Certificate will be
required to allocate a portion of the purchase price paid for the Certificates
to the right to receive payments from the Net WAC Rate Carryover Reserve Account
in respect of the Net WAC Rate Carryover Amount. The value of the right to
receive any such Net WAC Rate Carryover Amount is a question of fact which could
be subject to differing interpretations. Because the Net WAC Rate Carryover
Amount is treated as a separate right of the Offered Certificates not payable by
any REMIC elected by the Trust, such right will not be treated as a qualifying
asset for any Certificateholder that is a mutual savings bank, domestic building
and loan association, real estate investment trust, or real estate mortgage
investment conduit and any amounts received from the Net WAC Rate Carryover
Reserve Account will not be qualifying real estate income for real estate
investment trusts.
It is not anticipated that any REMIC elected by the Trust will engage
in any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any REMIC elected by the Trust, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Pooling Agreement, (ii) by the Servicer, if the Servicer
has breached its obligations with respect to REMIC compliance under the Pooling
S-84
Agreement and (iii) otherwise by the Trust, with a resulting reduction in
amounts otherwise distributable to the holders of the Offered Certificates.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Material Federal Income
Tax Considerations" in the prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates by or on behalf
of, or with plan assets of, a Plan may qualify for exemptive relief under the
Underwriters' Exemption, as currently in effect and as described under "ERISA
Considerations" in the prospectus. The Underwriters' Exemption relevant to the
Offered Certificates was granted by the Department of Labor on September 6, 1990
as Prohibited Transaction Exemption ("PTE") 90-59 at 55 F.R. 36724, and amended
on July 21, 1997 at PTE 97-34 at 62 F.R. 39021 and further amended on November
13, 2000 by PTE 2000-58 at 65 F.R. 67765. The Department of Labor issued a final
administrative exemption, PTE 2002-41, at 67 Fed. Reg. 54487 (August 22, 2002 ),
which amended the Underwriters' Exemption and similar exemptions issued to other
underwriters. This amendment allows the Trustee to be affiliated with the
underwriter despite the restriction in PTE 2000-58 to the contrary. However, the
Underwriters' Exemption contains a number of conditions which must be met for
the exemption to apply, including the requirements that the Offered Certificates
be rated at least "BBB-" (or its equivalent) by Fitch Ratings, Moody's or S&P at
the time of the Plan's purchase and that the investing Plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act. A fiduciary of a
Plan contemplating purchasing an Offered Certificate must make its own
determination that the conditions set forth in the Underwriters' Exemption will
be satisfied with respect to the those Certificates.
Each beneficial owner of a Mezzanine Certificate or any interest
therein will be deemed to have represented, by virtue of its acquisition or
holding of that certificate or interest therein, that either (i) it is not a
plan investor, (ii) it has acquired and is holding such Mezzanine Certificates
in reliance on the Underwriters' Exemption, and that it understands that there
are certain conditions to the availability of the Underwriters' Exemption,
including that the Mezzanine Certificates must be rated, at the time of
purchase, not lower than "BBB-" (or its equivalent) by Fitch Ratings, Moody's or
S&P or (iii) (1) it is an insurance company, (2) the source of funds used to
acquire or hold the certificate or interest therein is an "insurance company
general account," as such term is defined in PTCE 95-60, and (3) the conditions
in Sections I and III of PTCE 95-60 have been satisfied.
If any Mezzanine Certificate or any interest therein is acquired or
held in violation of the conditions described in the preceding paragraph, the
next preceding permitted beneficial owner will be treated as the beneficial
owner of that Mezzanine Certificate, retroactive to the date of transfer to the
purported beneficial owner. Any purported beneficial owner whose acquisition or
holding of any such certificate or interest therein was effected in violation of
the conditions described in the preceding paragraph will indemnify and hold
harmless the Depositor, the Trustee, the Servicer, any subservicer, and the
Trust from and against any and all liabilities, claims, costs or expenses
incurred by those parties as a result of that acquisition or holding.
Any fiduciary or other investor of plan assets that proposes to acquire
or hold the Offered Certificates on behalf of or with plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. See "Considerations for
Benefit Plan Investors" in the prospectus.
S-85
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the related underwriter that an investment
in the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
The Depositor makes no representation that the sale of any of the
Offered Certificates to a Plan or other purchaser acting on its behalf meets any
relevant legal requirement for investments by Plans generally or any particular
Plan, or that the investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA").
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions. See "Legal Investment" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated July 26, 2004 (the "Underwriting Agreement"), among the
Underwriters and the Depositor, the Depositor has agreed to sell to the
Underwriters, and the Underwriters have severally agreed to purchase from the
Depositor, the principal amount of the Offered Certificates (the "Underwritten
Certificates") set forth opposite their respective names.
ORIGINAL ORIGINAL ORIGINAL ORIGINAL ORIGINAL ORIGINAL
CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE
CLASS A-1 CLASS A-2 CLASS A-3 CLASS M-1 CLASS M-2 CLASS M-3
UNDERWRITERS CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- -------------------------------- -------------- -------------- -------------- -------------- -------------- --------------
Greenwich Capital Markets, Inc.. $ 72,000,000 $ 126,000,000 $ 28,941,300 $ 8,771,400 $ 7,936,200 $ 5,012,100
WaMu Capital Corp............... $ 8,000,000 $ 14,000,000 $ 3,215,700 $ 974,600 $ 881,800 $ 556,900
ORIGINAL ORIGINAL ORIGINAL ORIGINAL ORIGINAL ORIGINAL
CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE
CLASS M-4 CLASS M-5 CLASS M-6 CLASS M-7 CLASS M-8 CLASS M-9
UNDERWRITERS CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- -------------------------------- -------------- -------------- -------------- -------------- -------------- --------------
Greenwich Capital Markets, Inc.. $ 4,316,400 $ 4,037,400 $ 4,037,400 $ 3,341,700 $ 2,924,100 $ 2,784,600
WaMu Capital Corp............... $ 479,600 $ 448,600 $ 448,600 $ 371,300 $ 324,900 $ 309,400
Distribution of the Offered Certificates will be made from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor and
underwriting fees, will be approximately $300,045,835. The Underwriters'
commission will be any positive difference between the price it pays to the
Depositor for the Offered Certificates and the amount it receives from the sale
of the Offered Certificates to the public. In connection with the purchase and
sale of the Offered Certificates, the Underwriters may be deemed to have
received compensation from the Depositor in the form of underwriting discounts.
The Depositor has been advised by the Underwriters that they propose
initially to offer the Offered Certificates of each class to the public in
Europe and the United States.
S-86
Until the distribution of the Offered Certificates is completed, rules
of the SEC may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Offered Certificates. As an exception to
these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Offered Certificates. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Offered Certificates. In addition,
neither the Depositor nor the Underwriters make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Depositor has been advised by the Underwriters that they intend to
make a market in the Offered Certificates purchased by them but the Underwriters
have no obligation to do so. There can be no assurance that a secondary market
for the Offered Certificates will develop or, if it does develop, that it will
continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor and the Underwriters by Thacher Proffitt & Wood
LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A Certificates be rated "AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P") and Aaa by Moody's Investors Service, Inc.
("Moody's," and together with S&P, the "Rating Agencies"), that the Class M-1
Certificates be rated "AA+" by S&P and "Aa1" by Moody's, that the Class M-2
Certificates be rated "AA" by S&P and "Aa2" by Moody's, that the Class M-3
Certificates be rated "AA-" by S&P and "Aa3" by Moody's, that the Class M-4
Certificates be rated "A+" by S&P and "A1" by Moody's, that the Class M-5
Certificates be rated "A" by S&P and "A2" by Moody's, that the Class M-6
Certificates be rated "A-" by S&P and "A3" by Moody's, that the Class M-7
Certificates be rated "BBB+" by S&P and "Baa1" by Moody's, that the Class M-8
Certificates be rated "BBB" by S&P and "Baa2" by Moody's and that the Class M-9
Certificates be rated "BBB-" by S&P and "Baa3" by Moody's.
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of the
Net WAC Rate Carryover Amount or the possibility that a holder of an Offered
Certificate might realize a lower than anticipated yield.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
S-87
INDEX OF DEFINED TERMS
Accrual Period .............................................................S-52
Adjustable-Rate Mortgage Loans..............................................S-17
Adjusted Net Maximum Mortgage Rate..........................................S-60
Adjusted Net Mortgage Rate..................................................S-60
Adjustment Date ............................................................S-18
Advance ....................................................................S-38
Advancing Person ...........................................................S-39
Allocated Realized Loss Amount..............................................S-52
Assignment Agreement........................................................S-17
Assumed Final Distribution Date.............................................S-41
Available Funds ............................................................S-45
Basic Principal Distribution Amount.........................................S-52
Book-Entry Certificates.....................................................S-42
Cap Amount .................................................................S-61
Cap Provider ...............................................................S-61
Certificate Index ..........................................................S-59
Certificate Margin..........................................................S-59
Certificate Owners..........................................................S-42
Certificate Principal Balance...............................................S-52
Certificates................................................................S-41
Class A Certificates........................................................S-41
Class B Certificates........................................................S-41
Class B-1 Principal Distribution Amount.....................................S-52
Class B-2 Principal Distribution Amount.....................................S-52
Class M-1 Principal Distribution Amount.....................................S-53
Class M-2 Principal Distribution Amount.....................................S-53
Class M-3 Principal Distribution Amount.....................................S-53
Class M-4 Principal Distribution Amount.....................................S-54
Class M-5 Principal Distribution Amount.....................................S-54
Class M-6 Principal Distribution Amount.....................................S-54
Class M-7 Principal Distribution Amount.....................................S-55
Class M-8 Principal Distribution Amount.....................................S-55
Class M-9 Principal Distribution Amount.....................................S-55
Clearstream ................................................................S-42
Clearstream Participants....................................................S-43
Code ..................................................................S-8, S-82
Collection Account..........................................................S-36
Commission .................................................................S-65
Compensating Interest.......................................................S-39
Counterparty ...............................................................S-61
CPR ........................................................................S-66
Credit Enhancement Percentage...............................................S-56
Cut-off Date Principal Balance..............................................S-16
Definitive Certificate......................................................S-42
Delayed First Adjustment Mortgage Loan......................................S-18
Deleted Mortgage Loans......................................................S-36
Determination Date..........................................................S-56
Distribution Account........................................................S-36
Distribution Date .....................................................S-5, S-41
DTC ........................................................................S-42
DTC Participants ...........................................................S-42
Due Date ...................................................................S-19
Due Period .................................................................S-56
Euroclear ..................................................................S-42
Euroclear Operator..........................................................S-44
Euroclear Participants......................................................S-44
European Depositaries.......................................................S-42
Extra Principal Distribution Amount.........................................S-56
Financial Intermediary......................................................S-42
Fixed-Rate Mortgage Loans...................................................S-17
Fixed-Rate Prepayment Vector................................................S-66
Formula Rate ...............................................................S-59
Global Securities ...........................................................I-1
Gross Margin ...............................................................S-18
Group ......................................................................S-62
High Cost Loans ............................................................S-15
Homeownership Act ..........................................................S-15
IBA ........................................................................S-62
Index ......................................................................S-18
Initial Periodic Rate Cap...................................................S-18
Insurance Proceeds..........................................................S-56
Interest Remittance Amount..................................................S-56
IRS ........................................................................S-83
LIBOR Business Day..........................................................S-63
LIBOR Determination Date....................................................S-63
Liquidated Mortgage Loan....................................................S-58
Master Agreement ..........................................................S-17
Maximum Cap Rate ..........................................................S-60
Maximum Mortgage Rate.......................................................S-18
Mezzanine Certificates......................................................S-41
Minimum Mortgage Rate.......................................................S-18
Monthly Interest Distributable Amount.......................................S-56
Moody's ...............................................................S-8, S-87
Mortgage ...................................................................S-17
Mortgage Loan Schedule......................................................S-35
Mortgage Loans .............................................................S-17
Mortgage Pool ..............................................................S-17
Mortgage Rate ..............................................................S-17
Mortgaged Property..........................................................S-17
Net Liquidation Proceeds....................................................S-58
Net Monthly Excess Cashflow.................................................S-57
Net WAC Rate ...............................................................S-60
Net WAC Rate Carryover Amount...............................................S-60
Net WAC Rate Carryover Reserve Account......................................S-60
Notional Principal Contract Regulations.....................................S-83
Offered Certificates........................................................S-41
OID Regulations ............................................................S-83
Optional Termination Date...................................................S-40
Original Certificate Principal Balance......................................S-52
Originator .................................................................S-29
Overcollateralization Deficiency Amount.....................................S-57
Overcollateralization Release Amount........................................S-57
Overcollateralization Target Amount.........................................S-57
Overcollateralized Amount...................................................S-57
S-88
Parity Act .................................................................S-18
Pass-Through Rate ..........................................................S-59
Periodic Rate Cap ..........................................................S-18
Plan .......................................................................S-85
Pool Balance ...............................................................S-16
Pooling Agreement ..........................................................S-17
Prepayment Assumption.......................................................S-66
Prepayment Interest Shortfall...............................................S-39
Prepayment Period ..........................................................S-57
Principal Balance ..........................................................S-16
Principal Distribution Amount...............................................S-57
Principal Remittance Amount.................................................S-57
PTE ........................................................................S-85
Purchase Price .............................................................S-35
Rating Agencies ............................................................S-87
Realized Loss ..............................................................S-58
Record Date ................................................................S-41
Reference Banks ............................................................S-63
Related Documents ..........................................................S-35
Relevant Depositary.........................................................S-42
Relief Act .................................................................S-10
REMIC ......................................................................S-82
Reserve Interest Rate.......................................................S-63
Residual Certificates.......................................................S-41
Restructuring Law ..........................................................S-62
Rules ......................................................................S-42
S&P ...................................................................S-8, S-87
Servicer ...................................................................S-29
Servicing Advance...........................................................S-38
Servicing Fee ..............................................................S-39
Servicing Fee Rate..........................................................S-39
Six Month LIBOR ............................................................S-18
SMMEA .................................................................S-8, S-86
Stepdown Date ..............................................................S-58
Structuring Assumptions.....................................................S-66
Subordinate Certificates....................................................S-41
Substitution Adjustment.....................................................S-36
Telerate Page 3750..........................................................S-63
Termination Price ..........................................................S-40
Terminator .................................................................S-40
Terms and Conditions........................................................S-44
Trigger Event ..............................................................S-58
Trust ......................................................................S-17
Trustee Fee ................................................................S-39
Trustee Fee Rate ...........................................................S-39
Underwriters ..........................................................S-1, S-15
Underwriting Agreement......................................................S-86
Unpaid Interest Shortfall Amount............................................S-59
WestLB AG New York..........................................................S-62
S-89
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will
be offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC and upon request through Clearstream or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in accordance with their
normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-
day funds.
I-1
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
the actual number of days in such accrual period and a year assumed to consist
of 360 days or a 360-day year consisting of twelve 30 day months, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Clearstream
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Clearstream or Euroclear cash debt will be valued instead as of the actual
settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year consisting of twelve 30-day
months, as applicable. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash
I-2
proceeds in the Clearstream Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades will
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be readily available to eliminate this potential
problem:
(a) through Clearstream or Euroclear for one day (until the purchase
side of the day trade is reflected in their Clearstream or Euroclear accounts)
in accordance with the clearing system's customary procedures;
(b) the Global Securities in the U.S. from a DTC Participant no later
than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Clearstream or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner who is an individual or corporation holding the
Global Securities on its own behalf through Clearstream or Euroclear (or through
DTC if the holder has an address outside the U.S.) will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest (including
original issue discount) on registered debt issued by U.S. Persons, unless (i)
each clearing system, bank or other institution that holds customers' securities
in the ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner or a foreign partnership or trust and the U.S.
entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8BEN (Certificate
of Foreign Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are generally
effective until the third succeeding calendar year from the date such form is
signed. However, a Form W-8BEN or Form W-8ECI with a taxpayer identification
number will remain effective until a change in circumstances makes any
information on such form incorrect, provided that the withholding agent reports
at least annually to the beneficial owner of Form 1042-S.
I-3
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-4
PROSPECTUS
MORTGAGE-BACKED/ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
GREENWICH CAPITAL ACCEPTANCE, INC. OR FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
THE SECURITIES
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust or debt obligations secured
by trust assets.
EACH SERIES OF SECURITIES WILL CONSIST OF ONE OR MORE CLASSES.
o Each class of securities will represent the entitlement to a specified
portion of interest payments and a specified portion of principal
payments on the trust assets.
o A series may include classes of securities that are senior in right of
payment to other classes. Classes of securities may be entitled to
receive principal, interest or both prior to other classes or before
or after specified events.
o No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been
issued and sold, there can be no assurance that a resale market for
them will develop.
THE TRUST AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a trust will
include one or more of the following:
o mortgage loans secured generally by senior liens on one- to
four-family residential properties,
o closed-end and/or revolving home equity loans generally secured by
junior liens on one- to four-family residential properties,
o mortgage loans secured by senior liens on multifamily residential
properties,
o conditional sales contracts, installment sales agreements or loan
agreements secured by manufactured housing,
o home improvement installment sales contracts and loan agreements that
are either unsecured or secured generally by junior liens on one- to
four-family residential properties or by purchase money security
interests in the related home improvements,
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac, or
o private label mortgage-backed or asset-backed securities.
OFFERS OF THE SECURITIES
Offers of the securities may be made through one or more different methods. All
securities will be distributed by, or sold through underwriters managed by,
Greenwich Capital Markets, Inc.
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 OF THIS PROSPECTUS. The
securities represent obligations of the trust only and do not represent an
interest in or obligation of the applicable depositor, seller, master servicer
or any of their affiliates. This prospectus may be used to offer and sell the
securities only if accompanied by a prospectus supplement
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
APRIL 23, 2004
TABLE OF CONTENTS
PAGE
Important Notice About Information in This Prospectus and Each Accompanying Prospectus Supplement.................5
Risk Factors......................................................................................................6
The Trust Fund...................................................................................................16
The Mortgage Loans--General.........................................................................17
Single Family Loans................................................................................21
Home Equity Loans..................................................................................22
Multifamily Loans..................................................................................22
Manufactured Housing Contracts.....................................................................23
Home Improvement Contracts.........................................................................24
Agency Securities..................................................................................24
Private Label Securities...........................................................................30
Incorporation of Certain Information by Reference..................................................33
Use of Proceeds..................................................................................................33
The Depositors...................................................................................................33
Loan Program.....................................................................................................34
Underwriting Standards.............................................................................34
Qualifications of Sellers..........................................................................35
Representations by Sellers; Repurchases or Substitutions...........................................36
Description of the Securities....................................................................................38
General............................................................................................39
Distributions on Securities........................................................................41
Advances...........................................................................................44
Reports to Securityholders.........................................................................46
Credit Enhancement...............................................................................................47
General............................................................................................47
Subordination......................................................................................48
Pool Insurance Policies............................................................................50
FHA Insurance; VA Guarantees.......................................................................52
Special Hazard Insurance Policies..................................................................54
Bankruptcy Bonds...................................................................................55
FHA Insurance on Multifamily Loans.................................................................56
Reserve Accounts...................................................................................56
Cross Support......................................................................................57
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar
Instruments or Agreements..........................................................................57
2
Financial Instruments..............................................................................58
Yield and Prepayment Considerations..............................................................................58
Operative Agreements.............................................................................................61
Assignment of Trust Fund Assets....................................................................62
Payments on Loans; Deposits to Security Account....................................................65
Pre-Funding Account................................................................................67
Sub-Servicing of Loans.............................................................................67
Collection Procedures..............................................................................69
Hazard Insurance...................................................................................70
Realization upon Defaulted Mortgage Loans..........................................................72
Servicing and Other Compensation and Payment of Expenses...........................................75
Evidence as to Compliance..........................................................................75
Certain Matters Regarding the Master Servicer and the Depositors...................................76
Events of Default; Rights upon Event of Default....................................................77
Amendment..........................................................................................80
Termination; Optional Termination; Calls...........................................................81
The Trustee........................................................................................82
Material Legal Aspects of the Loans..............................................................................82
General............................................................................................82
Foreclosure........................................................................................86
Repossession of Manufactured Homes.................................................................88
Rights of Redemption...............................................................................90
Equitable Limitations on Remedies..................................................................90
Anti-Deficiency Legislation and Other Limitations on Lenders.......................................91
Homeownership Act and Similar State Laws...........................................................92
Due-on-Sale Clauses................................................................................94
Prepayment Charges; Late Fees......................................................................94
Applicability of Usury Laws........................................................................95
Servicemembers Civil Relief Act....................................................................96
Environmental Risks................................................................................96
The Home Improvement Contracts.....................................................................98
Installment Contracts..............................................................................99
Junior Mortgages; Rights of Senior Mortgagees.....................................................100
The Title I Program...............................................................................101
Material Federal Income Tax Consequences........................................................................106
General...........................................................................................106
Taxation of Debt Securities.......................................................................107
Non-REMIC Certificates............................................................................115
REMIC Certificates................................................................................127
State Tax Considerations........................................................................................152
ERISA Considerations............................................................................................153
3
Insurance Company General Accounts................................................................155
Prohibited Transaction Class Exemption 83-1.......................................................155
Underwriter Exemption.............................................................................155
Legal Investment Considerations.................................................................................158
Method of Distribution..........................................................................................160
Legal Matters...................................................................................................161
Financial Information...........................................................................................162
Available Information...........................................................................................162
Ratings.........................................................................................................162
Glossary of Terms...............................................................................................163
4
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
Although the accompanying prospectus supplement for a particular series of
securities cannot contradict the information contained in this prospectus,
insofar as the prospectus supplement contains specific information about the
series that differs from the more general information contained in this
prospectus, you should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
We include cross-references in this prospectus and each accompanying prospectus
supplement to captions in these materials where you can find further related
discussions. There is a Glossary of Terms beginning on page 164 where you will
find definitions of certain capitalized terms used in this prospectus. The
preceding Table of Contents and the Table of Contents included in each
accompanying prospectus supplement provide the pages on which these captions are
located.
---------------------
If you require additional information, the mailing address of the depositor's
principal executive offices is either Greenwich Capital Acceptance, Inc. or
Financial Acceptance Securities Corp., at 600 Steamboat Road, Greenwich,
Connecticut 06830 and the telephone number is (203) 625-2700. For other means of
acquiring additional information about us or a series of securities, see "The
Trust Fund -- Incorporation of Certain Information by Reference" on page 33 of
this prospectus.
--------------------
5
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION, TOGETHER WITH
THE INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT, SINCE IT IDENTIFIES THE PRINCIPAL RISK FACTORS ASSOCIATED WITH AN
INVESTMENT IN THE SECURITIES.
PRINCIPAL PREPAYMENTS ON THE
LOANS MAY ADVERSELY AFFECT THE
AVERAGE LIFE OF, AND RATE OF RETURN
ON, YOUR SECURITIES.............................You may be unable to reinvest
the principal payments on your
securities at a rate of return
at least equal to the rate on
your securities. The timing of
principal payments on the
securities of a series will be
affected by a number of factors,
including the following:
o the extent of prepayments
on the loans in the trust
or, if the trust is
comprised of underlying
securities, on the loans
backing the underlying
securities;
o how payments of principal
are allocated among the
classes of securities of
the series as specified
in the related prospectus
supplement;
o if any party has an
option to terminate the
related trust early or to
call your securities, the
effect of the exercise of
the option;
o the rate and timing of
defaults and losses on
the assets in the related
trust; and
o repurchases of assets in
the related trust as a
result of material
breaches of
representations and
warranties made by the
depositor or master
servicer.
The rate of prepayment of the
loans included in, or underlying
the assets held in, each trust
may affect the average life of
the securities.
ONLY THE ASSETS OF THE RELATED TRUST ARE
AVAILABLE TO PAY YOUR
SECURITIES.................................. Unless the applicable prospectus
supplement provides otherwise,
the securities of each series
will be payable solely from the
assets of the related trust,
including any applicable credit
enhancement, and will not have a
claim against the assets of any
other trust. If the assets of
the related trust are not
sufficient, you may suffer a
loss on your securities.
Moreover, at the times specified
in the related prospectus
6
supplement, assets of the trust
may be released to the
applicable depositor, master
servicer, any servicer, credit
enhancement provider or other
specified person, if all
payments then due on the
securities have been made and
adequate provision for future
payments on the remaining
securities has been made. Once
released, these assets will no
longer be available to make
payments on your securities
There will be no recourse
against the depositor, the
master servicer, any servicer or
any of their affiliates if a
required distribution on the
securities is not made. The
securities will not represent an
interest in, or an obligation
of, the depositor, the master
servicer, any servicer or any of
their affiliates.
The depositor's obligations are
limited to its representations
and warranties concerning the
trust assets. Because the
depositor has no significant
assets, if it is required to
repurchase trust assets due to
the breach of a representation
or warranty, the depositor's
source of funds for the
repurchase would be limited to:
o moneys obtained from
enforcing any similar
obligation of the seller
or originator of the
asset, or
o funds from a reserve
account or other credit
enhancement established
to pay for asset
repurchases.
CREDIT ENHANCEMENT MAY NOT BE
ADEQUATE TO PREVENT LOSSES ON
YOUR SECURITIES.................................Credit enhancement is intended
to reduce the effect of
delinquent payments or loan
losses on those classes of
securities that have the benefit
of the credit enhancement.
Nevertheless, the amount of any
credit enhancement is subject to
the limits described in the
related prospectus supplement.
Moreover, the amount of credit
enhancement may decline or be
depleted under certain
circumstances before the
securities are paid in full. As
a result, securityholders may
suffer losses. In addition,
credit enhancement may not cover
all potential sources of risk of
loss, such as fraud or
negligence by a loan originator
or other parties.
THE INTEREST ACCRUAL PERIOD MAY
REDUCE THE EFFECTIVE YIELD
ON YOUR SECURITIES..............................Interest payable on the
securities on any distribution
date will include all interest
accrued during the related
interest accrual period. The
interest accrual period for the
securities
7
of each series will be specified
in the applicable prospectus
supplement. If the interest
accrual period ends two or more
days before the related
distribution date, your
effective yield will be less
than it would be if the interest
accrual period ended the day
before the distribution date. As
a result, your effective yield
at par would be less than the
indicated coupon rate.
ECONOMIC, LEGAL AND OTHER
FACTORS COULD REDUCE THE AMOUNT
AND DELAY THE TIMING OF RECOVERIES
ON DEFAULTED LOANS..............................The following factors, among
others, could adversely affect
property values in such a way
that the outstanding balance of
the related loans would equal or
exceed those values:
o an overall decline in the
residential real estate
markets where the
properties are located,
o failure of borrowers to
maintain their properties
adequately, and
o natural disasters that
are not necessarily
covered by hazard
insurance, such as
earthquakes and floods.
If property values decline,
actual rates of delinquencies,
foreclosures and losses on the
loans could be higher than those
currently experienced by the
mortgage lending industry in
general.
Even if you assume that the
mortgaged properties provide
adequate security for the loans,
substantial delays could occur
before defaulted loans are
liquidated and the proceeds
forwarded to investors. Property
foreclosure actions are
regulated by state statutes and
rules and are subject to many of
the delays and expenses that
characterize other types of
lawsuits if defenses or
counterclaims are made. As a
result, foreclosure actions can
sometimes take several years to
complete. Moreover, some states
prohibit a mortgage lender from
obtaining a judgment against the
borrower for amounts not covered
by property proceeds if the
property is sold outside of a
judicial proceeding. As a
result, if a borrower defaults,
these restrictions may impede
the servicer's ability to
dispose of the borrower's
property and obtain sufficient
proceeds to repay the loan in
full. In addition, the servicer
is entitled to deduct from
liquidation proceeds all the
expenses it reasonably incurs in
trying to recover on the
defaulted loan, including legal
fees and costs, real estate
taxes, and
8
property preservation and
maintenance expenses.
State laws generally regulate
interest rates and other loan
charges, require certain
disclosures, and often require
licensing of loan originators
and servicers. In addition, most
states have other laws and
public policies for the
protection of consumers that
prohibit unfair and deceptive
practices in the origination,
servicing and collection of
loans. Depending on the
provisions of the particular law
or policy and the specific facts
and circumstances involved,
violations may limit the ability
of the servicer to collect
interest or principal on the
loans. Also, the borrower may be
entitled to a refund of amounts
previously paid and the servicer
may be subject to damage claims
and administrative sanctions.
LOANS SECURED BY JUNIOR LIENS ARE
SUBJECT TO ADDITIONAL RISKS.....................
If a loan is in a junior lien
position, a decline in property
values could extinguish the
value of the junior lien loan
before having any effect on the
related senior lien loan or
loans. In general, the expenses
of liquidating defaulted loans
do not vary directly with the
unpaid amount. So, assuming that
a servicer would take the same
steps to recover a defaulted
loan with a small unpaid balance
as it would a loan with a large
unpaid balance, the net amount
realized after paying
liquidation expenses would be a
smaller percentage of the
balance of the small loan than
of the large loan. Since the
mortgages securing home equity
loans typically will be in a
junior lien position, the
proceeds from any liquidation
will be applied first to the
claims of the related senior
mortgageholders, including
foreclosure costs. In addition,
a junior mortgage lender may
only foreclose subject to any
related senior mortgage. As a
result, the junior mortgage
lender generally must either pay
each related senior mortgage
lender in full at or before the
foreclosure sale or agree to
make the regular payments on
each senior mortgage. Since the
trust will not have any source
of funds to satisfy any senior
mortgages or to continue making
payments on them, the trust's
ability as a practical matter to
foreclose on any junior lien
will be limited.
9
LOANS TO LOWER CREDIT QUALITY
BORROWERS ARE MORE LIKELY
TO EXPERIENCE LATE PAYMENTS
AND DEFAULTS AND INCREASE YOUR RISK OF LOSS.....Trust assets may have been made
to lower credit quality
borrowers who fall into one of
two categories:
o customers with moderate
income, limited assets
and other income
characteristics that
cause difficulty in
borrowing from banks and
other traditional
lenders; or
o customers with a history
of irregular employment,
previous bankruptcy
filings, repossession of
property, charged-off
loans or garnishment of
wages.
The average interest rate
charged on loans made to these
types of borrowers is generally
higher than that charged by
lenders that typically impose
more stringent credit
requirements. There is a greater
likelihood of late payments on
loans made to these types of
borrowers than on loans to
borrowers with a higher credit
quality. In particular, payments
from borrowers with a lower
credit quality are more likely
to be sensitive to changes in
the economic climate in the
areas in which they reside.
As much as 20% (by principal
balance) of the trust assets for
any particular series of
securities may be contractually
delinquent as of the related
cut-off date.
FAILURE TO PERFECT SECURITY
INTERESTS IN MANUFACTURED
HOMES MAY RESULT IN LOSSES ON
YOUR SECURITIES ................................Each manufactured housing
conditional sales contract or
installment loan agreement that
is included in a trust fund will
be secured by a security
interest in the related
manufactured home. The steps
necessary to perfect the
security interest in a
manufactured home will vary from
state-to-state. If, as a result
of clerical error or otherwise,
the master servicer fails to
take the appropriate steps to
perfect the security interest in
a manufactured home that secures
a conditional sales contract or
installment loan agreement
included in the trust, the
trustee may not have a first
priority security interest in
that manufactured home.
Moreover, the master servicer
will not amend the certificate
of title to a manufactured home
to name the trustee as
lienholder, note the trustee's
interest on the certificate of
title or deliver the
10
certificate of title to the
trustee. As a result, in some
states the assignment of the
security interest in the
manufactured home to the trustee
may not be perfected or may not
be effective against creditors
of the master servicer or a
bankruptcy trustee in the event
of a bankruptcy of the master
servicer.
In addition, courts in many
states have held that
manufactured homes may, in
certain circumstances, become
subject to real estate title and
recording laws. As a result, the
security interest in each
manufactured home could be
rendered subordinate to the
interests of other parties
claiming an interest in that
manufactured home under
applicable state real estate
law.
The failure to properly perfect
a valid, first priority security
interest in a manufactured home
that secures a conditional sales
contract or installment loan
agreement included in the trust
could lead to losses that, to
the extent not covered by any
credit enhancement, could
adversely affect the yield to
maturity of the related
securities.
MULTIFAMILY LOANS GENERALLY ARE
RISKIER THAN SINGLE FAMILY LOANS................
Loans that are secured by first
liens on rental apartment
buildings or projects containing
five or more residential units,
together with loans that are
secured by first liens on
mixed-use properties, shall not
in the aggregate constitute 10%
or more of any pool by principal
balance. Multifamily loans are
generally considered riskier
than single-family loans for the
following reasons:
o Multifamily loans
typically are much larger
in amount, which
increases the risk
represented by the
default of a single
borrower.
o Repayment of a
multifamily loan usually
depends upon successful
management of the related
mortgaged property.
o Government regulations,
including rental control
laws, may adversely
affect future income from
mortgaged properties that
are subject to those
regulations.
11
In addition, because individual
multifamily loans often are
relatively large in amount,
principal prepayments resulting
from defaults, casualties,
condemnations or breaches of
representations and warranties
may adversely affect your yield.
LOANS WITH BALLOON PAYMENTS
MAY INCREASE YOUR RISK OF LOSS..................Certain loans may not be fully
amortizing and may require a
substantial principal payment (a
"balloon" payment) at their
stated maturity. Loans of this
type involve greater risk than
fully amortizing loans since the
borrower must generally be able
to refinance the loan or sell
the related property prior to
the loan's maturity date. The
borrower's ability to do so will
depend on such factors as the
level of available mortgage
rates at the time of sale or
refinancing, the relative
strength of the local housing
market, the borrower's equity in
the property, the borrower's
general financial condition and
tax laws.
IF AMOUNTS IN ANY PRE-FUNDING
ACCOUNT ARE NOT USED TO
PURCHASE TRUST ASSETS, YOU WILL
RECEIVE A PREPAYMENT ON THE
RELATED SECURITIES..............................The related prospectus
supplement may provide that the
depositor transfer a specified
amount into a pre-funding
account on the date the
securities are issued. In this
case, the transferred funds may
be used only to acquire
additional assets for the trust
during a set period after the
issuance. Any amounts remaining
in the account at the end of the
period will be distributed as a
prepayment of principal to the
holders of the related
securities. The resulting
prepayment could adversely
affect the yield on those
securities.
VIOLATIONS OF APPLICABLE FEDERAL
LAWS MAY REDUCE OR DELAY
MORTGAGE LOAN COLLECTIONS.......................The loans may also be subject to
federal laws relating to the
origination and underwriting.
These laws
o require certain
disclosures to the
borrowers regarding the
terms of the loans;
o prohibit discrimination
on the basis of age,
race, color, sex,
religion, marital status,
national origin, receipt
of public assistance or
the exercise of any right
under the consumer credit
protection act, in the
extension of credit;
12
o regulate the use and
reporting of information
related to the borrower's
credit experience; and
o require additional
application disclosures,
limit changes that may be
made to the loan
documents without the
borrower's consent and
restrict a lender's
ability to declare a
default or to suspend or
reduce a borrower's
credit limit to certain
enumerated events.
Loans may also be subject to
federal laws that impose
additional disclosure
requirements on creditors for
non-purchase money loans with
high interest rates or high
up-front fees and charges. These
laws can impose specific
statutory liabilities upon
creditors that fail to comply
and may affect the
enforceability of the related
loans. In addition, any assignee
of the creditor (including the
trust) would generally be
subject to all claims and
defenses that the borrower could
assert against the creditor,
including the right to rescind
the loan.
Loans relating to home
improvement contracts may be
subject to federal laws that
protect the borrower from
defective or incomplete work by
a contractor. These laws permit
the borrower to withhold payment
if the work does not meet the
quality and durability standards
agreed to between the borrower
and the contractor. These laws
have the effect of subjecting
any assignee of the seller
(including the trust) to all
claims and defenses which the
borrower in a sale transaction
could assert against the seller
of defective goods.
If certain provisions of these
federal laws are violated, the
master servicer may be unable to
collect all or part of the
principal or interest on the
loans. The trust also could be
subject to damages and
administrative enforcement.
PROCEEDS OF LIQUIDATED LOANS
GENERALLY ARE PAID FIRST TO
PROVIDERS OF TRUST SERVICES.....................There is no assurance that the
value of the trust assets for
any series of securities at any
time will equal or exceed the
principal amount of the
outstanding securities of that
series. If trust assets have to
be sold because of an event of
default or otherwise, providers
of services to the trust
(including the trustee, the
master servicer and the credit
enhancer, if any) generally will
be entitled to receive the
proceeds of the sale to the
extent of their unpaid fees and
other amounts due them before
any proceeds are paid to
investors. As a result, the
13
proceeds of such a sale may be
insufficient to pay the full
amount of interest and principal
of the related securities.
MORTGAGED PROPERTIES MAY BE
SUBJECT TO ENVIRONMENTAL RISKS
THAT COULD RESULT IN LOSSES.....................Federal, state and local laws
and regulations impose a wide
range of requirements on
activities that may affect the
environment, health and safety.
In certain circumstances, these
laws and regulations impose
obligations on owners or
operators of residential
properties such as those that
secure the loans included in a
trust. Failure to comply with
these laws and regulations can
result in fines and penalties
that could be assessed against
the trust as owner of the
related property. In some
states, a lien on the property
due to contamination has
priority over the lien of an
existing mortgage. Further, a
mortgage lender may be held
liable as an "owner" or
"operator" for costs associated
with the release of petroleum
from an underground storage tank
under certain circumstances. If
the trust is considered the
owner or operator of a property,
it will suffer losses as a
result of any liability imposed
for environmental hazards on the
property.
YOU MAY HAVE DIFFICULTY
SELLING YOUR SECURITIES OR
OBTAINING YOUR DESIRED PRICE....................No market will exist for the
securities before they are
issued. In addition, there can
be no assurance that a secondary
market will develop following
the issuance and sale of the
securities. Even if a secondary
market does develop, you may not
be able to sell your securities
when you wish to or at the price
you want.
RATINGS OF THE SECURITIES DO NOT
ADDRESS ALL INVESTMENT RISKS AND
MUST BE VIEWED WITH CAUTION.....................Any class of securities issued
under this prospectus and the
accompanying prospectus
supplement will be rated in one
of the four highest generic
rating categories of a
nationally recognized rating
agency. A rating is based on the
adequacy of the value of the
trust assets and any credit
enhancement for that class and
reflects the rating agency's
assessment of how likely it is
that holders of the class of
securities will receive the
payments to which they are
entitled. A rating does not
constitute an assessment of how
likely it is that principal
prepayments on the loans will be
made, the degree to which the
rate of prepayments might differ
from that originally anticipated
or the likelihood of early,
optional
14
termination of the securities.
You must not view a rating as a
recommendation to purchase, hold
or sell securities because it
does not address the market
price or suitability of the
securities for any particular
investor.
There is no assurance that any
rating will remain in effect for
any given period of time or that
the rating agency will not lower
or withdraw it entirely in the
future. The rating agency could
lower or withdraw its rating due
to:
o any decrease in the
adequacy of the value of
the trust assets or any
related credit
enhancement,
o an adverse change in the
financial or other
condition of a credit
enhancement provider, or
o a change in the rating of
the credit enhancement
provider's long-term
debt.
BOOK-ENTRY REGISTRATION MAY LIMIT
YOUR ABILITY TO SELL SECURITIES
AND DELAY YOUR RECEIPT OF
PAYMENTS........................................LIMIT ON LIQUIDITY OF
SECURITIES. Securities issued in
book-entry form may have only
limited liquidity in the resale
market, since investors may be
unwilling to purchase securities
for which they cannot obtain
physical instruments.
LIMIT ON ABILITY TO TRANSFER OR
PLEDGE. Transactions in
book-entry securities can be
effected only through The
Depository Trust Company, its
participating organizations, its
indirect participants and
certain banks. As a result, your
ability to transfer or pledge
securities issued in book-entry
form may be limited.
DELAYS IN DISTRIBUTIONS. You may
experience some delay in the
receipt of distributions on
book-entry securities since the
distributions will be forwarded
by the trustee to DTC for DTC to
credit the accounts of its
participants. In turn, these
participants will thereafter
credit the distributions to your
account either directly or
indirectly through indirect
participants.
There is a Glossary of Terms beginning on page 164 of this prospectus
where you will find definitions of the capitalized terms used in this
prospectus.
15
THE TRUST FUND
The trust fund for each series of certificates will be held by the
trustee named in the related prospectus supplement for the benefit of the
related securityholders. Each trust fund will consist of one or more pools of
the following asset types:
o Single Family Loans,
o Home Equity Loans,
o Multifamily Loans,
o Manufactured Housing Contracts,
o Home Improvement Contracts,
o Agency Securities or
o Private Label Securities,
in each case as specified in the related prospectus supplement, as well as
payments relating to the assets and other accounts, obligations or agreements,
as specified in the related prospectus supplement.
Whenever the terms "pool," "certificates" and "notes" are used in this
prospectus, these terms are intended to apply, unless the context indicates
otherwise, to a discrete asset pool and the certificates representing undivided
interests in, or the notes secured by the assets of, a particular trust fund
consisting primarily of the loans in that pool. Similarly, the term
"pass-through rate" refers to the pass-through rate borne by the certificates of
a particular series, the term "interest rate" refers to the coupon borne by
notes of a particular series and the term "trust fund" refers to the related
trust fund.
Unless the context indicates otherwise, the term "loan" includes Single
Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts and Home Improvement Contracts. Unless the context indicates
otherwise, the term "underlying loan" refers to the Single Family Loans, Home
Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home
Improvement Contracts backing or securing Agency Securities or Private Label
Securities.
The securities will be entitled to payment from the assets of the
related trust fund or other assets pledged for the benefit of the
securityholders as specified in the related prospectus supplement. The
securities will not be entitled to payments from the assets of any other trust
fund established by the depositor.
The loans, Agency Securities and Private Label Securities will be
acquired by the applicable depositor, either directly or through affiliates,
from sellers and conveyed by that depositor to the trustee named in the related
prospectus supplement for the benefit of the holders of the securities of the
related series. Sellers may have originated or purchased the assets. Loans
16
acquired by the applicable depositor will have been originated principally in
accordance with the general underwriting criteria specified in this prospectus
under the heading "Loan Program--Underwriting Standards" and as more
specifically provided in a related prospectus supplement.
Because the securities issued by a trust will be secured by assets
transferred to that trust by one of the depositors you should construe all
references in this prospectus to the "depositor" as referring to the applicable
depositor that transfers assets to your trust under the applicable operative
documents.
The master servicer named in the related prospectus supplement will
service the trust fund assets, either directly or through sub-servicers, under a
servicing agreement for the related series of securities. If the securities are
certificates, the servicing agreement will be in the form of a pooling and
servicing agreement among the depositor, the master servicer and the trustee. If
the securities are notes, the servicing agreement generally will be between the
trustee and the master servicer.
The following sections contain a brief description of the assets
expected to be included in the trust funds. If specific information respecting
the assets is not known at the time the related series of securities initially
is offered, more general information of the nature described below will be
provided in the related prospectus supplement, and specific information will be
set forth in a report on Form 8-K to be filed with the SEC within 15 days after
the initial issuance of the securities. A copy of the operative agreements with
respect to the related series of securities will be attached to the Form 8-K and
will be available for inspection at the corporate trust office of the trustee
specified in the related prospectus supplement. A schedule of the assets
relating to the series will be attached to the related servicing agreement
delivered to the trustee upon issuance of the securities.
THE MORTGAGE LOANS--GENERAL
The loans in each trust fund are secured by the related mortgaged
properties. Except in the case of Multifamily Loans, the related mortgaged
properties generally consist of detached or semi-detached one- to four-family
dwellings, town houses, rowhouses, individual units in condominiums, individual
units in planned unit developments and certain other dwelling units. In
addition, if the related prospectus supplement so provides, the mortgaged
properties may include mixed-use properties. Mixed-use properties consist of
structures principally containing residential units but also including other
space used for retail, professional and other commercial uses. Loans that are
secured by multifamily and mixed-use properties shall not in the aggregate
constitute 10% or more of any pool by principal balance.
The mortgaged properties may include vacation and second homes,
investment properties and leasehold interests as specified in the related
prospectus supplement. The mortgaged properties may be located in any one of the
fifty states, the District of Columbia, Guam, Puerto Rico or any other territory
of the United States. If a loan has a loan-to-value ratio or principal balance
in excess of a particular benchmark, it may be covered in whole or in part by a
primary mortgage insurance policy. If the loans in a pool are covered by this
type of policy, the related prospectus supplement will describe the existence,
extent and duration of the coverage.
17
Unless otherwise specified in the related prospectus supplement, all of
the loans in a pool will have monthly payments due on the first day of each
month. The payment terms of the mortgage loans to be included in a trust fund
will be described in the related prospectus supplement and may include one or
more of the following features or other features described in the related
prospectus supplement:
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to
an index that will be specified in the related
prospectus supplement,
- a rate that is fixed for a period of time or under
certain circumstances and is followed by an
adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to
a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations.
Accrued interest may be deferred and added to the principal of a loan
for the periods and under the circumstances specified in the related
prospectus supplement. A mortgage loan may provide for the payment of
interest at a rate lower than the specified interest rate borne by the
loan for a period of time or for the life of the loan, and the amount
of any difference may be contributed from funds supplied by the seller
of the related mortgaged property or another source.
o Principal may be
- payable on a level debt service basis to fully
amortize the loan over its term,
- calculated on the basis of an assumed amortization
schedule that is significantly longer than the
original term to maturity or on an interest rate that
is different from the loan rate, or
- nonamortizing during all or a portion of the original
term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a "balloon" payment. Principal may include
interest that has been deferred and added to the principal balance of
the loan.
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time, or
18
- change from period to period.
Loans may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum amounts
of monthly payments.
o Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline
over time, and may be prohibited for the life of the loan or
during any lockout periods. Some loans may permit prepayments
after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any
subsequent prepayment. Other loans may permit prepayments
without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due-on-sale"
clauses which permit the lender to demand payment of the
entire loan in connection with the sale or certain transfers
of the related mortgaged property. Other loans may be
assumable by persons meeting the then applicable underwriting
standards of the related seller.
Each prospectus supplement will contain information, as of the date of
the prospectus supplement and to the extent then specifically known to the
depositor, with respect to the loans contained in the related pool, including
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the
applicable cut-off date,
o the type of mortgaged property securing each loan,
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal
balance of the loans,
o the earliest origination date and latest maturity date of the
loans,
o the aggregate principal balance of loans having loan-to-value
ratios at origination exceeding 80%,
o the loan rates or fixed percentage rates (APRs) or range of
loan rates or APRs borne by the loans, and
o the geographical location of the related mortgaged properties
on a state-by-state basis.
If specific information respecting the loans is not known to the depositor at
the time the related securities are initially offered, more general information
of the nature described in the immediately preceding sentence will be provided
in the related prospectus supplement, and specific information will be set forth
in the Form 8-K to be filed with the SEC within 15 days after issuance.
The loan-to-value ratio of a loan at any given time is the ratio,
expressed as a percentage, of the then outstanding principal balance of the loan
to the collateral value of the related mortgaged property. Unless otherwise
specified in the related prospectus supplement, the
19
collateral value of a mortgaged property, other than with respect to loans used
to refinance an existing loan, is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of the loan
and (b) the sales price for the property. In the case of refinance loans, the
collateral value of the related mortgaged property is the appraised value of the
property determined in an appraisal obtained at the time of refinancing. Unless
otherwise specified in the related prospectus supplement, for purposes of
calculating the loan-to-value ratio of a Manufactured Housing Contract relating
to a new manufactured home, the collateral value is no greater than the sum of
o a fixed percentage of the list price of the unit actually
billed by the manufacturer to the dealer, net of freight to
the dealer site but including any accessories identified in
the invoice (I.E., the "manufacturer invoice price"),
o the actual cost of any accessories depending on the size of
the unit, and
o the cost of state and local taxes, filing fees and up to three
years' prepaid hazard insurance premiums.
Unless otherwise specified in the related prospectus supplement, the collateral
value of a used manufactured home is the least of the sales price, appraised
value, and National Automobile Dealers' Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a manufactured home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
The loan-to-value ratio of a Home Improvement Contract will be computed
in the manner described in the related prospectus supplement.
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding principal balances
of the loans in a particular pool, and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors which may or may not
affect real property values may affect the timely payment by borrowers of
scheduled payments of principal and interest on the loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any pool.
In the case of Multifamily Loans, these other factors could include
o excessive building resulting in an oversupply of rental
housing stock,
o a decrease in employment reducing the demand for rental units
in an area,
o federal, state or local regulations and controls affecting
rents, prices of goods and energy,
20
o environmental restrictions,
o increasing labor and material costs, and
o the relative attractiveness to tenants of the mortgaged
properties.
To the extent that losses are not covered by subordination provisions or
alternative arrangements, losses will be borne, at least in part, by the
securityholders of the securities of the related series.
Unless otherwise specified in the related prospectus supplement, the
only obligations of the depositor with respect to a series of certificates will
be to obtain certain representations and warranties from the related seller and
to assign to the trustee for that series of certificates the depositor's rights
with respect to those representations and warranties. SEE "Operative
Agreements--Assignment of Trust Fund Assets" in this prospectus.
The obligations of the master servicer with respect to the mortgage
loans will consist principally of:
o its contractual servicing obligations under the related
servicing agreement, including its obligation to enforce the
obligations of the sub-servicers or sellers, or both, as more
fully described in this prospectus under the headings
"Mortgage Loan Program--Representations by Sellers;
Repurchases" and "Operative Agreements--Sub-Servicing by
Sellers" and "--Assignment of Trust Fund Assets"; and
o its obligation to make certain cash advances in the event of
delinquencies in payments with respect to the mortgage loans
in the amounts described in this prospectus under the heading
"Description of the Certificates--Advances".
The obligations of the master servicer to make advances may be subject to
limitations, to the extent provided in this prospectus and in the related
prospectus supplement.
SINGLE FAMILY LOANS
Unless otherwise specified in the related prospectus supplement, Single
Family Loans will consist of loans or participations or other beneficial
interests in loans secured by mortgages or deeds of trust that create first
liens on one- to four-family residential properties. If specified in the related
prospectus supplement, Single Family Loans may include cooperative loans secured
by security interests in shares issued by private, non-profit, cooperative
housing corporations and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. If specified in the related prospectus supplement, the
assets of the related trust fund may include mortgage participation certificates
evidencing interests in Single Family Loans. Single Family Loans may be
conventional loans (loans that are not insured or guaranteed by any governmental
agency), loans insured by the Federal Housing Administration (FHA) or partially
guaranteed by the Veterans Administration (VA), as specified in the related
prospectus supplement. Unless otherwise specified in the related prospectus
supplement, Single Family Loans will have individual principal balances at
origination of not less than $25,000 and not more than $1,000,000, and original
terms to stated maturity of from ten to 40 years.
21
If specified in the related prospectus supplement, the mortgaged
properties securing Single Family Loans may include five- to eight-family
residential properties and small mixed-use properties. In the case of leasehold
interests, the term of the leasehold will exceed the scheduled maturity of the
related mortgage loan by at least five years, unless otherwise specified in the
related prospectus supplement.
HOME EQUITY LOANS
Unless otherwise specified in the related prospectus supplement, Home
Equity Loans will consist of closed-end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential properties.
As more fully described in the related prospectus supplement, interest
on each revolving credit line loan, excluding introductory rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of the loan. Principal amounts on a
revolving credit line loan may be drawn down (up to the maximum amount specified
in the related prospectus supplement) or repaid from time to time, but may be
subject to a minimum periodic payment. Except to the extent provided in the
related prospectus supplement, the trust fund will not include any amounts
borrowed under a revolving credit line loan after the cut-off date. The full
amount of a closed-end loan is advanced at the inception of the loan and
generally is repayable in equal (or substantially equal) installments in an
amount necessary to fully amortize such loan at its stated maturity. Except to
the extent provided in the related prospectus supplement, the original terms to
stated maturity of closed-end loans will not exceed 360 months. Under certain
circumstances, under either a revolving credit line loan or a closed-end loan, a
borrower may choose an interest only payment option, in which event the borrower
is obligated to pay only the amount of interest which accrued on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
MULTIFAMILY LOANS
Multifamily Loans will consist of loans or participations or other
beneficial interests in loans secured by mortgages that create first liens on
rental apartment buildings or projects containing five or more residential
units. If specified in the related prospectus supplement, the mortgage assets of
a trust fund may include mortgage participation certificates evidencing
interests in Multifamily Loans. Multifamily Loans may be conventional loans or
FHA-insured loans, as specified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, all Multifamily Loans
will have original terms to stated maturity of not more than 40 years.
Multifamily Loans shall not constitute 10% or more of any pool by
principal balance.
Mortgaged properties securing Multifamily Loans may include high-rise,
mid-rise and garden apartments. Multifamily Loans may be secured by apartment
buildings owned by cooperatives. A cooperative owns all the apartment units in
its building and all common areas and is owned by tenant-stockholders who,
through ownership of stock, shares or membership
22
certificates in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific apartments or units.
Generally, a tenant-stockholder of a cooperative must make a monthly payment to
the cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for the cooperative's mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant-stockholder
must make on any loans to the tenant-stockholder secured by his shares in the
cooperative. The cooperative will be directly responsible for building
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. A cooperative's ability to meet debt service obligations on
a Multifamily Loan, as well as all other operating expenses, will be dependent
in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
MANUFACTURED HOUSING CONTRACTS
Manufactured Housing Contracts will consist of manufactured housing
conditional sales contracts and installment sales or loan agreements, each
secured by a manufactured home. Manufactured Housing Contracts may be
conventional, insured by the FHA or partially guaranteed by the VA, as specified
in the related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, each Manufactured Housing Contract will be fully
amortizing and will bear interest at a fixed percentage rate or APR. Unless
otherwise specified in the related prospectus supplement, Manufactured Housing
Contracts will all have individual principal balances at origination of not less
than $10,000 and not more than $1,000,000 and original terms to stated maturity
of from five to 30 years.
When we use the term "manufactured home" in this prospectus, we mean,
as stated in 42 U.S.C. ss. 5402(6), "a structure, transportable in one or more
sections which, in the traveling mode, is eight body feet or more in width or
forty body feet or more in length or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
Each prospectus supplement will specify for the Manufactured Housing
Contracts contained in the related trust fund, among other things, the dates of
origination of the Manufactured Housing Contracts, the APRs on the Manufactured
Housing Contracts, the loan-to-value ratios of the Manufactured Housing
Contracts, the minimum and maximum outstanding principal balances as of the
cut-off date and the average outstanding principal balance, the outstanding
principal balances of the Manufactured Housing Contracts included in the related
trust fund, and the original maturities of the Manufactured Housing Contracts
and the last maturity date of any Manufactured Housing Contract.
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HOME IMPROVEMENT CONTRACTS
Home Improvement Contracts are originated by home improvement
contractors, thrifts or commercial mortgage bankers in the ordinary course of
business. As specified in the related prospectus supplement, the Home
Improvement Contracts will either be unsecured or secured by mortgages or deeds
of trust generally creating a junior lien on the related mortgaged properties,
or secured by purchase money security interests in the financed home
improvements. Unless otherwise specified in the related prospectus supplement,
the Home Improvement Contracts will be fully amortizing and may have fixed
interest rates or adjustable interest rates and may provide for other payment
characteristics as described in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
home improvements securing the Home Improvement Contracts will include, but are
not limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OR GINNIE MAE. The Government
National Mortgage Association (Ginnie Mae) is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. Section 306(g) of Title II of the National Housing Act of 1934, as
amended, authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates which represent an interest in a pool of FHA
loans, which are mortgage loans insured by the FHA under the National Housing
Act or under Title V of the Housing Act of 1949, or VA loans, which are mortgage
loans partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or Chapter 37 of Title 38 of the United States Code.
Section 306(g) of the National Housing Act provides that "the full
faith and credit of the United States is pledged to the payment of all amounts
which may be required to be paid under any guaranty under this subsection." In
order to meet its obligations under any such guarantee, Ginnie Mae may, under
Section 306(d) of the National Housing Act, borrow from the United States
Treasury in an unlimited amount which is at any time sufficient to enable Ginnie
Mae to perform its obligations under its guarantee.
GINNIE MAE CERTIFICATES. Each Ginnie Mae Certificate held in a trust
fund will be a "fully modified pass-through" mortgage-backed certificate issued
and serviced by a Ginnie Mae issuer that is a mortgage banking company or other
financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. The Ginnie Mae Certificates may be
either Ginnie Mae I Certificates issued under the Ginnie Mae I program or Ginnie
Mae II Certificates issued under the Ginnie Mae II program. The mortgage loans
underlying the Ginnie Mae Certificates will consist of FHA loans and/or VA
loans. Each such mortgage loan is secured by a one- to four-family or
multifamily residential property. Ginnie Mae will approve the issuance of each
Ginnie Mae Certificate in accordance with a guaranty agreement between Ginnie
Mae and the Ginnie Mae issuer. Pursuant to its guaranty agreement, a Ginnie Mae
issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each Ginnie Mae Certificate, even if the payments
received by the Ginnie
24
Mae issuer on the underlying FHA loans or VA loans are less than the amounts due
on the related Ginnie Mae Certificate.
The full and timely payment of principal of and interest on each Ginnie
Mae Certificate will be guaranteed by Ginnie Mae, which obligation is backed by
the full faith and credit of the United States. Each Ginnie Mae Certificate will
have an original maturity of not more than 30 years, but may have original
maturities of substantially less than 30 years. Each Ginnie Mae Certificate will
be based on and backed by a pool of FHA loans or VA loans secured by one- to
four-family residential properties and will provide for the payment by or on
behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae
Certificate scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
the Ginnie Mae Certificate, less the applicable servicing and guarantee fee
which together equal the difference between the interest on the FHA Loan or VA
Loan and the pass-through rate on the Ginnie Mae Certificate. In addition, each
payment will include proportionate pass-through payments of any prepayments of
principal on the FHA loans or VA loans underlying the Ginnie Mae Certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA loans or VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
Certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of the Ginnie Mae Certificate.
In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer
fails to notify and request Ginnie Mae to make the payment, the holder of the
Ginnie Mae Certificate will have recourse only against Ginnie Mae to obtain
payment. The trustee or its nominee, as registered holder of the Ginnie Mae
Certificates held in a trust fund, will have the right to proceed directly
against Ginnie Mae under the terms of the guaranty agreements relating to those
Ginnie Mae Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae I Certificate
must have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae
I Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the Ginnie Mae I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular Ginnie Mae II Certificate may
have per annum interest rates that vary from one another by up to one percentage
point. The interest rate on each Ginnie Mae II Certificate will be between
one-half percentage point and one and one-half percentage points lower than the
highest interest rate on the mortgage loans included in the pool of mortgage
loans underlying the Ginnie Mae II Certificate (except for pools of mortgage
loans secured by manufactured homes).
Regular monthly installment payments on each Ginnie Mae Certificate
held in a trust fund will be comprised of interest due as specified on the
Ginnie Mae Certificate plus the scheduled principal payments on the FHA loans or
VA loans underlying the Ginnie Mae Certificate due on the first day of the month
in which the scheduled monthly installments on the
25
Ginnie Mae Certificate are due. Regular monthly installments on each Ginnie Mae
Certificate are required to be paid to the trustee as registered holder by the
15th day of each month in the case of a Ginnie Mae I Certificate, and are
required to be mailed to the trustee by the 20th day of each month in the case
of a Ginnie Mae II Certificate. Any principal prepayments on any FHA loans or VA
loans underlying a Ginnie Mae Certificate held in a trust fund or any other
early recovery of principal on such loan will be passed through to the trustee
as the registered holder of the Ginnie Mae Certificate.
Ginnie Mae Certificates may be backed by graduated payment mortgage
loans or by "buydown" mortgage loans for which funds will have been provided
(and deposited into escrow accounts) for application to the payment of a portion
of the borrowers' monthly payments during the early years of such mortgage
loans. Payments due the registered holders of Ginnie Mae Certificates backed by
pools containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae Certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of the graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae Issuer will be the same irrespective of whether
the Ginnie Mae Certificates are backed by graduated payment mortgage loans or
"buydown" mortgage loans. No statistics comparable to the FHA's prepayment
experience on level payment, non-"buydown" mortgage loans are available in
respect of graduated payment or "buydown" mortgages. Ginnie Mae Certificates
related to a series of certificates may be held in book-entry form.
If specified in a prospectus supplement, Ginnie Mae Certificates may be
backed by multifamily mortgage loans having the characteristics specified in the
prospectus supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION OR FREDDIE MAC. The Federal Home
Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned, government
sponsored enterprise created pursuant to Title III of the Emergency Home Finance
Act of 1970, as amended. Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of the purchase of first lien conventional mortgage
loans, or participation interests in the mortgage loans, and the sale of the
mortgage loans or participations so purchased in the form of mortgage
securities, primarily Freddie Mac Certificates. Freddie Mac is confined to
purchasing, so far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
FREDDIE MAC CERTIFICATES. Each Freddie Mac Certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA loans or VA loans. Freddie Mac Certificates are sold
under the terms of a mortgage participation certificate agreement. A Freddie Mac
Certificate may be issued under either Freddie Mac's Cash Program or its
Guarantor Program.
26
Mortgage loans underlying the Freddie Mac Certificates held by a trust
fund will consist of mortgage loans with original terms to maturity of from ten
to 40 years. Each such mortgage loan must meet the applicable standards set
forth in the legislation that established Freddie Mac. The pool of loans backing
a Freddie Mac Certificate may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac pool. Under the Guarantor Program, however, the
pool of loans backing a Freddie Mac Certificate may include only whole loans or
participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans represented by that Freddie Mac Certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie Mac
Certificate that the holder will collect all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related prospectus supplement for a series of certificates, guarantee the
timely payment of scheduled principal. Under Freddie Mac's Gold PC Program,
Freddie Mac guarantees the timely payment of principal based on the difference
between the pool factor, published in the month preceding the month of
distribution, and the pool factor published in such month of distribution.
Pursuant to its guarantees, Freddie Mac indemnifies holders of Freddie Mac
Certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. Freddie Mac may remit the amount
due on account of its guaranty of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer or (iii) 30 days following the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying Freddie Mac Certificates, including the timing of demand for
acceleration, Freddie Mac reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for Freddie Mac to
determine that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and Freddie Mac has not adopted standards which
require that the demand be made within any specified period.
Freddie Mac Certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
or entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and
27
principal received by Freddie Mac by virtue of condemnation, insurance,
liquidation or foreclosure, and repurchases of the mortgage loans by Freddie Mac
or the seller thereof. Freddie Mac is required to remit each registered Freddie
Mac Certificateholder's pro rata share of principal payments on the underlying
mortgage loans, interest at the Freddie Mac pass-through rate and any other sums
such as prepayment fees, within 60 days of the date on which those payments are
deemed to have been received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount
by which interest rates on the mortgage loans underlying a Freddie Mac
Certificate may exceed the pass-through rate on the Freddie Mac Certificate.
Under this program, Freddie Mac purchases groups of whole mortgage loans from
sellers at specified percentages of their unpaid principal balances, adjusted
for accrued or prepaid interest, which, when applied to the interest rate of the
mortgage loans and participations purchased, results in the yield (expressed as
a percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a particular Freddie Mac pool under the Cash Program will
vary since mortgage loans and participations are purchased and assigned to a
Freddie Mac pool based upon their yield to Freddie Mac rather than on the
interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor
Program, the pass-through rate on a Freddie Mac Certificate is established based
upon the lowest interest rate on the underlying mortgage loans, minus a minimum
servicing fee and the amount of Freddie Mac's management and guaranty income as
agreed upon between the related seller and Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership
on or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a Freddie
Mac Certificate will be distributed so as to be received normally by the 15th
day of the second month following the month in which the purchaser becomes a
registered holder of the Freddie Mac Certificates. Thereafter, such remittance
will be distributed monthly to the registered holder so as to be received
normally by the 15th day of each month. The Federal Reserve Bank of New York
maintains book-entry accounts with respect to Freddie Mac Certificates sold by
Freddie Mac, and makes payments of principal and interest each month to the
registered Freddie Mac Certificateholders in accordance with the holders'
instructions.
FEDERAL NATIONAL MORTGAGE ASSOCIATION OR FANNIE MAE. The Federal
National Mortgage Association (Fannie Mae) is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, Fannie Mae helps to redistribute mortgage funds from capital-surplus
to capital-short areas.
28
FANNIE MAE CERTIFICATES. Fannie Mae Certificates are Guaranteed
Mortgage Pass-Through Certificates representing fractional undivided interests
in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet
the applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a trust fund
will consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be from eight to 15
years or from 20 to 40 years. The original maturities of substantially all of
the fixed rate level payment FHA loans or VA loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae Certificate may have annual
interest rates that vary by as much as two percentage points from one another.
The rate of interest payable on a Fannie Mae Certificate is equal to the lowest
interest rate of any mortgage loan in the related pool, less a specified minimum
annual percentage representing servicing compensation and Fannie Mae's guaranty
fee. Under a regular servicing option pursuant to which the mortgagee or each
other servicer assumes the entire risk of foreclosure losses, the annual
interest rates on the mortgage loans underlying a Fannie Mae Certificate will be
between 25 basis points and 250 basis points greater than is its annual
pass-through rate. Under a special servicing option pursuant to which Fannie Mae
assumes the entire risk for foreclosure losses, the annual interest rates on the
mortgage loans underlying a Fannie Mae Certificate will generally be between 30
basis points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the related prospectus supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae
Certificate that it will distribute amounts representing the holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae Certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, or entitled to, the full
faith and credit of the United States. Although the Secretary of the Treasury of
the United States has discretionary authority to lend Fannie Mae up to $2.25
billion outstanding at any time, neither the United States nor any of its
agencies or instrumentalities is obligated to finance Fannie Mae's operations or
to assist Fannie Mae in any other manner. If Fannie Mae were unable to satisfy
its obligations, distributions to holders of Fannie Mae Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of Fannie Mae Certificates
would be affected by delinquent payments and defaults on such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae Certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie
29
Mae Certificate is entered in the books of the Federal Reserve Banks (or
registered on the Fannie Mae Certificate register in the case of fully
registered Fannie Mae Certificates) as of the close of business on the last day
of the preceding month. With respect to Fannie Mae Certificates issued in
book-entry form, distributions will be made by wire and, with respect to fully
registered Fannie Mae Certificates, distributions will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of
one or more stripped mortgage-backed securities as described in this prospectus
and in the related prospectus supplement. Each Agency Security of this type will
represent an undivided interest in all or part of the principal distributions -
but not the interest distributions, or the interest distributions - but not the
principal distributions, or in some specified portion of the principal and
interest distributions on certain Freddie Mac, Fannie Mae or Ginnie Mae
Certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae or Ginnie Mae, each as trustee, or by another trustee
named in the related prospectus supplement. Freddie Mac, Fannie Mae or Ginnie
Mae will guaranty each stripped Agency Security to the same extent as such
entity guarantees the underlying securities backing the stripped Agency
Security, unless otherwise specified in the related prospectus supplement.
OTHER AGENCY SECURITIES. If specified in the related prospectus
supplement, a trust fund may include other mortgage pass-through certificates
issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The
characteristics of any such mortgage pass-through certificates will be described
in the related prospectus supplement. If specified in the related prospectus
supplement, a combination of different types of Agency Securities may be held in
a trust fund.
PRIVATE LABEL SECURITIES
GENERAL. Private Label Securities or PLS (I.E., private mortgage-backed
or asset-backed securities) may consist of
o pass-through certificates or participation certificates
evidencing an undivided interest in a pool of Single Family
Loans, Home Equity Loans, Multifamily Loans, Manufactured
Housing Contracts or Home Improvement Contracts,
o collateralized mortgage obligations secured by Single Family
Loans, Home Equity Loans, Multifamily Loans, Manufactured
Housing Contracts or Home Improvement Contracts, or
o other Private Label Securities.
Private Label Securities may include stripped mortgage-backed securities
representing an undivided interest in all or a part of the principal
distributions - but not the interest distributions, or the interest
distributions - but not the principal distributions, or in some specified
portion of the principal and interest distributions on certain mortgage loans.
The Private Label Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement. Unless otherwise
specified in the related prospectus supplement, the seller/servicer of the
underlying loans will have entered into a PLS Agreement with a trustee under
that agreement. The PLS trustee or its agent, or a custodian, will possess the
mortgage loans underlying the Private Label Securities. The loans underlying the
Private Label Securities will
30
be serviced by a PLS servicer directly or by one or more subservicers which may
be subject to the supervision of the PLS servicer. Unless otherwise specified in
the related prospectus supplement, the PLS servicer will be a Fannie Mae- or
Freddie Mac-approved servicer and, if FHA loans underlie the Private Label
Securities, approved by HUD as an FHA mortgagee.
The PLS issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending, a public agency or
instrumentality of a state, local or federal government, or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling housing loans to trusts and selling beneficial
interests in trusts. If specified in the related prospectus supplement, the PLS
issuer may be an affiliate of the depositor. The obligations of the PLS issuer
will generally be limited to certain representations and warranties with respect
to the assets it conveys to the related trust. Unless otherwise specified in the
related prospectus supplement, the PLS issuer will not have guaranteed any of
the assets conveyed to the related trust or any of the Private Label Securities
issued under the PLS agreement. Additionally, although the loans underlying the
Private Label Securities may be guaranteed by an agency or instrumentality of
the United States, the Private Label Securities themselves will not be so
guaranteed, unless the related prospectus supplement specifies otherwise.
Distributions of principal and interest will be made on the Private
Label Securities on the dates specified in the related prospectus supplement.
The Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase assets underlying the Private Label Securities after a particular
date or under other circumstances specified in the related prospectus
supplement.
UNDERLYING LOANS. The loans underlying the PMBS may consist of fixed
rate, level payment, fully amortizing loans or graduated payment mortgage loans,
buydown loans, adjustable rate mortgage loans, or loans having balloon or other
special payment features. The loans may be secured by one- to four-family
residential property, small mixed-use property, five- to eight-family
residential property, multifamily property, manufactured homes or by an
assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a cooperative and the related shares issued by the
cooperative. Except as otherwise specified in the related prospectus supplement,
the loans will have the following characteristics:
o no loan will have had a loan-to-value ratio at origination in
excess of 95%;
o each Single Family Loan secured by a mortgaged property having
a loan-to-value ratio in excess of 80% at origination will be
covered by a primary mortgage insurance policy;
o each loan will have had an original term to stated maturity of
not less than five years and not more than 40 years;
31
o no loan that was more than 89 days delinquent as to the payment of
principal or interest will have been eligible for inclusion in the
assets under the related PLS agreement;
o each loan (other than a cooperative loan) will be required to be
covered by a standard hazard insurance policy (which may be a
blanket policy); and
o each loan (other than a cooperative loan or a Manufactured Housing Contract)
will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE LABEL SECURITIES. Credit support in
the form of reserve funds, subordination of other private label securities
issued under the PLS agreement, letters of credit, surety bonds, insurance
policies or other types of credit support may be provided with respect to the
loans underlying the Private Label Securities or with respect to the Private
Label Securities themselves.
ADDITIONAL INFORMATION. If the trust fund for a series of securities
includes Private Label Securities, the related prospectus supplement will
specify
o the aggregate approximate principal amount and type of Private
Label Securities to be included in the trust fund,
o the maximum original term-to-stated maturity of the PLS,
o the weighted average term-to-stated maturity of the PLS,
o the pass-through or certificate rate of the PLS,
o the weighted average pass-through or interest rate of the PLS,
o the PLS issuer, the PLS servicer (if other than the PLS
issuer) and the PLS trustee,
o certain characteristics of any credit support such as reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties relating to the loans underlying the Private Label
Securities themselves,
o the terms on which the loans underlying the PLS may, or are
required to, be purchased prior to their stated maturity or
the stated maturity of the PLS and
o the terms on which mortgage loans may be substituted for those
originally underlying the PLS.
In addition, the related prospectus supplement will provide information
about the loans which comprise the underlying assets of the Private Label
Securities, including
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental
entity,
32
o the servicing fee or range of servicing fees with respect to
the loans, and
o the minimum and maximum stated maturities of the underlying
loans at origination.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We incorporate in this prospectus by reference all documents and
reports filed by the applicable depositor, Greenwich Capital Acceptance, Inc.
(GCA) or Financial Acceptance Securities Corp. (FASCO), with respect to a trust
fund pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, prior to the termination of the offering of certificates
evidencing interests in that trust fund. Upon request by any person to whom this
prospectus is delivered in connection with the offering of one or more classes
of certificates, the applicable depositor will provide without charge a copy of
any such documents and/or reports incorporated herein by reference, in each case
to the extent that the documents or reports relate to those classes of
certificates, other than the exhibits to the documents (unless the exhibits are
specifically incorporated by reference in such documents). Requests to the
depositors should be directed in writing to: Paul D. Stevelman, Greenwich
Capital Acceptance, Inc. or Financial Acceptance Securities Corp. as applicable,
600 Steamboat Road, Greenwich, Connecticut 06830, telephone number (203)
625-2700. Each depositor has determined that its financial statements are not
material to the offering of any of the securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Investors may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a website at http:\\www.sec.gov
containing reports, proxy and information statements and other information
regarding issuers, including each trust fund, that file electronically with the
SEC.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the applicable depositor to the purchase of trust fund assets or will
be used by the depositor for general corporate purposes. The depositors expect
to sell securities in series from time to time, but the timing and amount of
offerings of securities will depend on a number of factors, including the volume
of assets acquired by the depositors, prevailing interest rates, availability of
funds and general market conditions.
THE DEPOSITORS
Greenwich Capital Acceptance, Inc. is a Delaware corporation organized
on April 23, 1987, and Financial Asset Securities Corp. is a Delaware
corporation organized on August 2, 1995, in each case for the limited purpose of
acquiring, owning and transferring mortgage assets and selling interests in
those assets or bonds secured by those assets. Each of the depositors is an
indirect, limited purpose finance subsidiary of Royal Bank of Scotland Plc and
an affiliate of Greenwich Capital Markets, Inc. Greenwich Capital Markets, Inc.
is a registered broker-dealer engaged in the U.S. government securities market
and related capital markets business. Each of
33
the depositors maintains its principal office at 600 Steamboat Road, Greenwich,
Connecticut 06830 and the telephone number is (203) 625-2700.
Neither the depositors nor any of their affiliates will ensure or
guarantee distributions on the securities of any series.
LOAN PROGRAM
The depositor will have purchased the loans, either directly or through
affiliates, from sellers. Unless otherwise specified in the related prospectus
supplement, the loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified under the heading
"--Underwriting Standards" below.
UNDERWRITING STANDARDS
Unless otherwise specified in the related prospectus supplement, each
seller will represent and warrant that all the loans that it originated and/or
sold to the depositor or one of the depositor's affiliates will have been
underwritten in accordance with standards consistent with those utilized by
institutional lenders generally during the period of origination for similar
types of loans. As to any loan insured by the FHA or partially guaranteed by the
VA, the related seller will represent that it has complied with the underwriting
policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate a prospective borrower's credit standing and repayment ability, and the
value and adequacy of the mortgaged property as collateral. In general, a
prospective borrower applying for a loan is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information, including the principal balance and payment history of any senior
lien loan on the related mortgaged property. As part of the description of the
borrower's financial condition, the borrower generally is required to provide a
current list of assets and liabilities and a statement of income and expenses,
as well as an authorization to apply for a credit report which summarizes the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. Generally, an employment verification is obtained from an
independent source, which is typically the borrower's employer. The verification
reports the borrower's length of employment with its employer, current salary,
and expectations of continued employment. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related prospectus
supplement.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. The appraisal generally is based on
the market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the subject home. In
connection with a Manufactured Housing Contract, the appraisal is based on
recent sales of comparable
34
manufactured homes and, when deemed applicable, a replacement cost analysis
based on the cost of a comparable manufactured home. In connection with a
Multifamily Loan, the appraisal must specify whether an income analysis, a
market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a multifamily project's cashflow, expenses,
capitalization and other operational information in determining the property's
value. The market approach to value focuses its analysis on the prices paid for
the purchase of similar properties in the multifamily project's area, with
adjustments made for variations between these other properties and the
multifamily project being appraised. The cost approach calls for the appraiser
to make an estimate of land value and then determine the current cost of
reproducing the building less any accrued depreciation. In any case, the value
of the property being financed, as indicated by the appraisal, must be such that
it currently supports, and is anticipated to support in the future, the
outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available
o to meet the borrower's monthly obligations on the proposed
loan, generally determined on the basis of the monthly
payments due in the year of origination, and other expenses
related to the mortgaged property such as property taxes and
hazard insurance, and
o to meet monthly housing expenses and other financial
obligations and monthly living expenses.
The underwriting standards applied by sellers, particularly with respect to the
level of loan documentation and the borrower's income and credit history, may be
varied in appropriate cases where factors such as low loan-to-value ratios or
other favorable credit exist.
In the case of a loan secured by a leasehold interest in real property,
the title to which is held by a third-party lessor, the related seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term of the
related mortgage note.
Some types of loans which may be included in the pools may involve
additional uncertainties not present in traditional types of loans. For example,
loans may provide for escalating or variable payments by the borrower. These
types of loans are generally underwritten on the basis of a judgment that
borrowers will have the ability to make the monthly payments required initially.
In some instances, however, their incomes may not be sufficient to permit
continued loan payments as payments increase. These types of loans may also be
underwritten primarily upon the basis of loan-to-value ratios or other favorable
credit factors.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related prospectus supplement, each
seller will be required to satisfy the qualifications set forth in the following
sentence. Each seller must
35
o be an institution experienced in originating and servicing
loans of the type contained in the related pool in accordance
with accepted practices and prudent guidelines,
o maintain satisfactory facilities to originate and service the
loans,
o be a seller/servicer approved by either Fannie Mae or Freddie
Mac, and
o be a mortgagee approved by the FHA or an institution the
deposit accounts in which are insured by the Federal Deposit
Insurance Corporation (FDIC).
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each seller will have made representations and warranties in respect of
the loans sold by that seller and evidenced by a series of securities. These
representations and warranties, unless otherwise provided in the related
prospectus supplement, generally include the following:
o Except in the case of a cooperative loan, each Single Family
Loan, Home Equity Loan or Multifamily Loan has a title
insurance policy, required hazard insurance policy and any
required primary mortgage insurance policy, each of which was
in effect at the origination of the loan and remained in
effect on the date that the loan was purchased from the seller
by or on behalf of the depositor. If the related mortgaged
property is located in an area where title insurance policies
are generally not available, an attorney's certificate of
title may be substituted.
o The seller had good title to each loan and no loan was subject
to offsets, defenses, counterclaims or rights of rescission
except to the extent that any specified buydown agreement may
forgive certain indebtedness of a borrower.
o Each loan constituted a valid lien on, or a perfected security
interest with respect to, the related mortgaged property,
subject only to permissible title insurance exceptions, if
applicable, and certain other exceptions described in the
related servicing agreement.
o The mortgaged property was free from damage and was in
acceptable condition.
o There were no delinquent tax or assessment liens against the
mortgaged property.
o No required payment on a loan was delinquent more than 30
days.
o Each loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and
regulations, in all material respects.
If specified in the related prospectus supplement, the representations
and warranties of a seller in respect of a loan will be made not as of the
related cut-off date but as of the date on which the seller sold the loan to the
depositor or one of its affiliates. Under these circumstances, a substantial
period of time may have elapsed between that date and the date of initial
issuance of the series of securities evidencing an interest in, or secured by,
the loan. Since the representations and warranties of a seller do not address
events that may occur following the sale
36
of the loan by that seller, the repurchase obligation described in the following
paragraph will not arise if the relevant event that would otherwise have given
rise to the obligation occurs after the date when the seller sold the loan to
the depositor or one of its affiliates. However, the depositor will not include
any loan in a trust fund if anything has come to the depositor's attention that
would cause it to believe that the representations and warranties of the related
seller regarding that loan will not be accurate and complete in all material
respects as of the date when the related series of securities is issued. If the
master servicer is also a seller of loans for a particular series, these
representations will be in addition to the representations and warranties made
by the master servicer in its capacity as master servicer.
Unless otherwise specified in the related prospectus supplement, the
seller will make certain representations and warranties in connection with
Manufactured Housing Contracts included in the trust with respect to the
enforceability of coverage under any related insurance policy or hazard
insurance policy. The seller, if required by the rating agencies rating the
related issue of securities, will obtain a surety bond, guaranty, letter of
credit or other acceptable instrument to support its repurchase or substitution
obligation specified in the immediately following paragraph.
The master servicer, or the trustee if the master servicer is the
seller, will promptly notify the relevant seller of any breach of any
representation or warranty made by that seller in respect of a loan which
materially and adversely affects the interests of the securityholders in the
loan. Unless otherwise specified in the related prospectus supplement, if the
seller cannot cure the breach within 90 days after notice from the master
servicer or the trustee, as the case may be, then the seller will be obligated
EITHER
o to repurchase that loan from the trust fund at a purchase
price equal to 100% of the loan's unpaid principal balance as
of the date of the repurchase plus accrued interest thereon to
the first day of the month following the month of repurchase
at the related loan rate, less any advances made by the seller
or amount payable as related servicing compensation if the
seller is the master servicer, OR
o substitute for that loan a replacement loan that satisfies the
requirements set forth in the related prospectus supplement.
This repurchase or substitution obligation will constitute the sole
remedy available to the securityholders or the trustee for a breach of
representation or warranty by the seller.
Except in those cases in which the master servicer is the seller, the
master servicer will be required under the applicable servicing agreement to
enforce this obligation for the benefit of the trustee and the related
securityholders, following the practices it would employ in its good faith
business judgment were it the owner of the loan.
If a REMIC election is to be made with respect to a trust fund, unless
otherwise provided in the related prospectus supplement, the master servicer or
a holder of the related residual certificate will be obligated to pay any
prohibited transaction tax which may arise in connection with a repurchase or
substitution. Unless otherwise specified in the related prospectus supplement,
the master servicer will be entitled to reimbursement for any such payment from
the
37
assets of the related trust fund or from any holder of the related residual
certificate. SEE "Description of the Securities--General" in this prospectus.
Neither the depositor nor the master servicer - unless the master
servicer is the seller - will be obligated to purchase a loan if the seller
defaults on its obligation to do so. No assurance can be given that sellers will
carry out their respective repurchase or substitution obligations with respect
to the loans. However, to the extent that a breach of a representation and
warranty of a seller may also constitute a breach of a representation made by
the master servicer, the master servicer may have a repurchase or substitution
obligation as described under the heading "Operative Agreements--Assignment of
Trust Fund Assets" in this prospectus.
DESCRIPTION OF THE SECURITIES
Either Greenwich Capital Acceptance, Inc. or Financial Asset Securities
Corp., as depositor, will establish a trust fund for each series of securities.
A particular series of securities will consist of mortgage-backed or
asset-backed certificates or notes or both certificates and notes.
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or a trust agreement, dated as of the related cut-off date,
among the depositor, the trustee and, if the trust includes loans, the related
master servicer. The provisions of each pooling and servicing agreement or trust
agreement will vary depending upon the nature of the related certificates and
the related trust fund. Forms of pooling and servicing and trust agreements are
exhibits to the Registration Statement of which this prospectus forms a part.
Each series of notes will be issued under an indenture between the
related trust fund and the trustee named in the prospectus supplement for that
series. If the trust fund includes loans, the trust fund and the servicer of the
loans will also enter into a servicing agreement. Forms of indenture and
servicing agreement have been filed as an exhibit to the registration statement
of which this prospectus forms a part.
The following summaries describe the material provisions which may
appear in each pooling and servicing agreement or trust agreement, in the case
of a series of certificates, and in each indenture and servicing agreement, in
the case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the operative agreements relating to
that series which materially differs from the description contained in this
prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
related agreements and prospectus supplement. The applicable depositor will
provide a copy of the operative agreements (without exhibits) relating to any
series without charge, upon written request of a holder of record of a
certificate or note of the series, addressed to Greenwich Capital Acceptance,
Inc. or Financial Asset Securities Corp., as applicable, 600 Steamboat Road,
Greenwich, Connecticut 06830, Attention: Asset Backed Finance Group.
38
GENERAL
Unless otherwise specified in the related prospectus supplement, the
securities of each series will
o be issued in fully registered form only, in the authorized
denominations specified in the prospectus supplement,
o evidence specified beneficial ownership interests in the trust
fund assets, in the case of a series of certificates, or be
secured by the pledge of the trust fund assets, in the case of
a series of notes, and
o not be entitled to payments in respect of the assets included
in any other trust fund established by the depositor.
The securities will not represent obligations of the depositor or any of its
affiliates. The loans will not be insured or guaranteed by any governmental
entity or other person, unless otherwise specified in the related prospectus
supplement.
To the extent provided in the related operative agreements, each trust
fund will consist of the following:
o the assets as from time to time are subject to the related
agreement, exclusive of any amounts specified in the related
prospectus supplement as "retained interest";
o those assets as from time to time are required to be deposited
in the related security account as defined under the heading
"Operative Agreements--Payments on Loans; Deposits to Security
Account" in this prospectus;
o property which secured a loan and which is acquired on behalf
of the securityholders by foreclosure or deed in lieu of
foreclosure; and
o primary mortgage insurance policies, FHA insurance and VA
guarantees, if any, and any other insurance policies or other
forms of credit enhancement required to be maintained pursuant
to the related agreement.
If specified in the related prospectus supplement, a trust fund may also include
one or more of the following:
o reinvestment income on payments received on the trust fund
assets,
o a reserve fund,
o a pool insurance policy,
o a special hazard insurance policy,
o a bankruptcy bond,
39
o one or more letters of credit,
o a surety bond,
o guaranties, or
o similar instruments or other agreements.
Each series of securities will be issued in one or more classes. Each
class of securities of a series will evidence beneficial ownership of a
specified portion or percentage - which may be 0% - of future interest payments
and a specified portion or percentage - which may be 0% - of future principal
payments on the assets in the related trust fund. A series of securities may
include one or more classes that are senior in right to payment to one or more
other classes of securities of the series. A series or classes of securities may
be covered by insurance policies, surety bonds or other forms of credit
enhancement, in each case as described in this prospectus and in the related
prospectus supplement. Distributions on one or more classes of a series of
securities may be made prior to being made on one or more other classes, after
the occurrence of specified events, in accordance with a schedule or formula, on
the basis of collections from designated portions of the trust fund assets or on
a different basis, in each case as specified in the related prospectus
supplement. The timing and amounts of distributions may vary among classes or
over time as specified in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement,
distributions of principal and interest, or, where applicable, of principal only
or interest only, on the related securities will be made by the trustee on each
distribution date. Distributions will be made monthly, quarterly, semi-annually,
or at such other intervals and on the dates as are specified in the related
prospectus supplement, in proportion to the percentages specified in the
prospectus supplement. Distributions will be made to the persons in whose names
the securities are registered at the close of business on the applicable record
date specified in the related prospectus supplement. Distributions will be made
in the manner specified in the related prospectus supplement to the persons
entitled to them at the address appearing in the register maintained for the
securityholders. In the case of the final distribution in retirement of the
securities, payment will be made only upon presentation and surrender of the
securities at the office or agency of the trustee or other person specified in
the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee named in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law, the purchase and holding of certain classes of
certificates by or on behalf of, or with the assets of, an employee benefit plan
or other retirement plan or arrangement subject to the provisions of ERISA or
the Internal Revenue Code may result in "prohibited transactions" within the
meaning of ERISA or Section 4975 of the Code. SEE "ERISA Considerations" in this
prospectus.
As to each series of securities, an election may be made to treat the
related trust fund, or designated portion of the trust fund, as a "real estate
mortgage investment conduit" (REMIC) as
40
defined in the Internal Revenue Code. The related prospectus supplement will
specify whether a REMIC election is to be made. Alternatively, the operative
agreement for a series may provide that a REMIC election may be made at the
discretion of the depositor or the master servicer and may only be made if
certain conditions are satisfied. As to any series of securities for which a
REMIC election will be made, the terms and provisions applicable to the making
of the REMIC election, as well as any material federal income tax consequences
to securityholders not otherwise described in this prospectus, will be set forth
in the related prospectus supplement. If a REMIC election is made with respect
to a series, one of the classes will be designated as evidencing the sole class
of "residual interests" in the related REMIC, as defined in the Code. All other
classes of securities in that series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each series with respect to which a
REMIC election is to be made, the master servicer or a holder of the related
residual certificate will be obligated to take all actions required in order to
comply with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. Unless otherwise specified in the related
prospectus supplement, the master servicer will be entitled to reimbursement for
any such payment from the assets of the trust fund or from any holder of the
related residual certificate.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of
distributions on a particular series of securities will depend on the type of
credit support, if any, that is used with respect to that series. SEE "Credit
Enhancement" in this prospectus. Set forth below are descriptions of various
methods that may be used to determine the amount of distributions on the
securities of a particular series. The prospectus supplement for each series of
securities will describe the method to be used in determining the amount of
distributions on the securities of that series.
The trustee will make distributions allocable to principal and interest
on the securities out of, and only to the extent of, funds in the related
security account, including any funds transferred from any reserve account. As
between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of principal prepayments
and scheduled payments of principal) and interest, distributions made on any
distribution date will be applied as specified in the related prospectus
supplement. Unless otherwise specified in the related prospectus supplement,
distributions to any class of securities will be made pro rata to all
securityholders of that class.
AVAILABLE FUNDS. All distributions on the securities of each series on
each distribution date will be made from Available Funds in accordance with the
terms described in the related prospectus supplement and specified in the
related operative agreement. Unless otherwise provided in the related prospectus
supplement, the term "Available Funds" for each distribution date will equal the
sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal, including principal prepayments, if any,
and prepayment penalties, if so provided in the related
prospectus supplement, and interest on the mortgage loans in
the related trust fund (including Liquidation Proceeds and
Insurance Proceeds and amounts drawn under letters of credit
or other credit enhancement instruments as permitted
thereunder and as specified in the related operative
agreement) received by the master
41
servicer after the cut-off date and on or prior to the related
determination date specified in the prospectus supplement
except:
o all payments which were due on or before the cut-off date;
o all Liquidation Proceeds and all Insurance Proceeds, all
principal prepayments and all other proceeds of any loan
purchased by the depositor, the master servicer, any
sub-servicer or any seller pursuant to the related operative
agreement that were received after the prepayment period
specified in the prospectus supplement and all related
payments of interest representing interest for any period
after the related collection period;
o all scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of
distribution;
o amounts received on particular loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance
in respect of those loans made by the master servicer, the
related sub-servicers, support servicers or the trustee;
o amounts representing reimbursement, to the extent permitted by
the related operative agreement and as described under the
heading "--Advances" immediately below, for advances made by
the master servicer, sub-servicers, support servicers or the
trustee that were deposited into the security account, and
amounts representing reimbursement for certain other losses
and expenses incurred by the master servicer or the depositor
and described below; and
o that portion of each collection of interest on a particular
loan in the trust fund which represents servicing compensation
payable to the master servicer or retained interest which is
to be retained from such collection or is permitted to be
retained from related Insurance Proceeds, Liquidation Proceeds
or proceeds of loans purchased pursuant to the related
operative agreement;
(ii) the amount of any advance made by the master servicer, sub-servicer,
support servicer or the trustee as described under "--Advances"
immediately below and deposited by it in the security account;
(iii) if applicable, amounts withdrawn from a reserve account;
(iv) any applicable, amounts provided under a letter of credit, insurance
policy, surety bond or other third-party credit enhancement; and
(v) if applicable, the amount of any prepayment interest shortfall.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the related
prospectus supplement, interest will accrue on the aggregate principal balance
of each class of securities or the aggregate notional principal balance of each
class of securities entitled to distributions of interest only at the
pass-through rate (or interest rate) and for the periods specified in the
42
prospectus supplement. Except in the case of a class of accrual securities that
provides for interest that accrues but is not currently payable, the
pass-through rate may be a fixed rate or an adjustable rate that adjusts as
specified in the prospectus supplement. Interest accrued during each specified
period on each class of securities entitled to interest will be distributable on
the distribution dates specified in the related prospectus supplement, to the
extent that funds are available, until the aggregate principal balance of the
securities of that class has been distributed in full or, in the case of a class
of securities entitled only to distributions allocable to interest, until the
aggregate notional principal balance of that class is reduced to zero or for the
period of time designated in the related prospectus supplement. The original
principal balance of each security will equal the aggregate distributions
allocable to principal to which that security is entitled. Unless otherwise
specified in the related prospectus supplement, distributions allocable to
interest on each security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of that
security. The notional principal balance of a security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
With respect to any class of accrual securities, if specified in the
related prospectus supplement, any interest that has accrued but is not paid on
any distribution date will be added to the aggregate principal balance of that
class on that distribution date. Unless otherwise specified in the related
prospectus supplement, distributions of interest on each class of accrual
securities will commence only after the occurrence of the events specified in
the prospectus supplement. Unless otherwise specified in the related prospectus
supplement, the beneficial ownership interest of a class of accrual securities
in the trust fund will increase on each distribution date, as reflected in the
aggregate principal balance of that class, by the amount of interest that
accrued on that class during the preceding interest accrual period but was not
required to be distributed to the class on the distribution date. Each class of
accrual securities will thereafter accrue interest on the outstanding aggregate
principal balance of that class as so increased.
DISTRIBUTIONS OF PRINCIPAL. Unless otherwise specified in the related
prospectus supplement, the aggregate principal balance of any class of
securities entitled to distributions of principal will equal
o the original aggregate principal balance of that class as
specified in the related prospectus supplement
REDUCED BY
o all distributions reported to securityholders of that class as
allocable to principal
INCREASED BY
o in the case of a class of accrual securities, all interest
accrued but not then distributable on that class and
o subject to
o in the case of adjustable rate certificates, the effect of any
negative amortization.
43
The related prospectus supplement will specify the method by which the amount of
principal to be distributed on the securities on each distribution date will be
calculated and the manner in which the amount will be allocated among the
classes of securities entitled to distributions of principal.
If so provided in the related prospectus supplement, one or more
classes of senior securities will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of such payments in
the percentages and under the circumstances or for the periods specified in the
prospectus supplement. Any allocation of principal prepayments to a class or
classes of senior securities will have the effect of accelerating the
amortization of the senior securities while increasing the interests evidenced
by the subordinated securities in the related trust fund. Increasing the
interests of the subordinated securities relative to that of the senior
securities is intended to preserve the availability of the subordination
provided by the subordinated securities. SEE "Credit Enhancement--Subordination"
in this prospectus.
UNSCHEDULED DISTRIBUTIONS. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described in this paragraph and the following paragraph and in the prospectus
supplement. The trustee will be required to make such unscheduled distributions
on the day and in the amount specified in the related prospectus supplement if,
due to substantial payments of principal - including principal prepayments - on
the trust fund assets, the trustee or the master servicer determines that the
funds available or anticipated to be available from the security account and, if
applicable, from any reserve account may be insufficient to make required
distributions on the securities on that distribution date. Unless otherwise
specified in the related prospectus supplement, the amount of any unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
securities on the next distribution date. Unless otherwise specified in the
related prospectus supplement, all unscheduled distributions will include
interest at the applicable pass-through rate, if any, on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
securities would have been made on the next distribution date, and with respect
to securities of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the trustee prior to the date of distribution.
ADVANCES
Unless otherwise provided in the related prospectus supplement, the
master servicer will be required to make advances, from its own funds, from
funds advanced by sub-servicers or support servicers or from funds held in the
security account for future distributions to the securityholders. On each
distribution date, the amount of any advances will be equal to the
44
aggregate of payments of principal and interest that were delinquent on the
related determination date and were not advanced by any sub-servicer, subject to
the master servicer's determination that these advances will be recoverable from
late payments by borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise. In the case of cooperative loans, the master servicer also will be
required to advance any unpaid maintenance fees and other charges under the
related proprietary leases as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to the securityholders
rather than to guarantee or insure against losses. If advances are made by the
master servicer from cash being held for future distribution to securityholders,
the master servicer will replace those funds on or before any future
distribution date to the extent that funds in the applicable security account on
a distribution date would be less than the amount required to be available for
distributions to securityholders on that date. Any funds advanced by the master
servicer will be reimbursable to the master servicer out of recoveries on the
specific loans with respect to which the advances were made (E.G., late payments
made by the related borrower, any related Insurance Proceeds, Liquidation
Proceeds or proceeds of any loan purchased by a sub-servicer or a seller under
the circumstances described in this prospectus). Advances by the master servicer
and any advances by a sub-servicer or a support servicer also will be
reimbursable to the master servicer or sub-servicer or support servicer, as
applicable, from cash otherwise distributable to securityholders, including the
holders of senior securities, to the extent that the master servicer determines
that any advances previously made are not ultimately recoverable as described in
this paragraph. The master servicer also will be obligated to make advances, to
the extent recoverable out of Insurance Proceeds, Liquidation Proceeds or
otherwise, in respect of certain taxes and insurance premiums not paid by
borrowers on a timely basis. Funds so advanced are reimbursable to the master
servicer to the extent permitted by the related operative agreement. If
specified in the related prospectus supplement, the obligations of the master
servicer to make advances may be supported by a cash advance reserve fund, a
surety bond or other arrangement, in each case as described in the related
prospectus supplement.
The master servicer or sub-servicer may enter into a support agreement
with a support servicer pursuant to which the support servicer agrees to provide
funds on behalf of the master servicer or sub-servicer in connection with the
obligation of the master servicer or sub-servicer, as the case may be, to make
advances. The support agreement will be delivered to the trustee and the trustee
will be authorized to accept a substitute support agreement in exchange for an
original support agreement, provided that the substitution of the support
agreement will not adversely affect the rating or ratings assigned to the
securities by each rating agency named in the related prospectus supplement.
Unless otherwise provided in the prospectus supplement, in the event
the master servicer, a sub-servicer or a support servicer fails to make an
advance, the trustee will be obligated to make the advance in its capacity as
successor servicer. If the trustee makes an advance, it will be entitled to be
reimbursed for that advance to the same extent and degree as the master
servicer, a sub-servicer or a support servicer is entitled to be reimbursed for
advances. SEE "--Distributions on Securities" above.
45
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a distribution date
and except as otherwise set forth in the related prospectus supplement, the
master servicer or the trustee will furnish to each securityholder of record of
the related series a statement setting forth, to the extent applicable to that
series of securities, among other things:
o the amount of the distribution that is allocable to principal,
separately identifying the aggregate amount of any principal
prepayments and, if specified in the prospectus supplement,
any prepayment penalties included in the distribution;
o the amount of the distribution allocable to interest;
o the amount of any advances;
o the aggregate amount (a) otherwise allocable to the
subordinated securityholders on that distribution date and (b)
withdrawn from the reserve fund, if any, that is included in
the amounts distributed to the senior securityholders;
o the outstanding aggregate principal balance or notional
principal balance of each class after giving effect to the
distribution of principal on that distribution date;
o the percentage of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to
receive on the following distribution date;
o the percentage of principal prepayments on the mortgage loans,
if any, which each class will be entitled to receive on the
following distribution date;
o the amount of the servicing compensation retained or withdrawn
from the security account by the master servicer and the
amount of additional servicing compensation received by the
master servicer attributable to penalties, fees, excess
Liquidation Proceeds and other similar charges and items;
o the number and aggregate principal balance of mortgage loans
delinquent, but not in foreclosure, (i) from 30 to 59 days,
(ii) from 60 to 89 days and (iii) 90 days or more, as of the
close of business on the last day of the calendar month
preceding that distribution date;
o the number and aggregate principal balance of mortgage loans
delinquent and in foreclosure (i) from 30 to 59 days, (ii)
from 60 to 89 days and (iii) 90 days or more, as of the close
of business on the last day of the calendar month preceding
that distribution date;
o the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure and, if the real
estate secured a Multifamily Loan, any additional information
specified in the prospectus supplement;
46
o if a class is entitled only to a specified portion of interest
payments on the loans in the related pool, the pass-through
rate, if adjusted from the date of the last statement, of the
loans expected to be applicable to the next distribution to
that class;
o if applicable, the amount remaining in any reserve account at
the close of business on that distribution date;
o the pass-through rate as of the day prior to the immediately
preceding distribution date; and
o the amounts remaining under any letters of credit, pool
policies or other forms of credit enhancement applicable to
the certificates.
Where applicable, any amount set forth in the above list may be
expressed as a dollar amount per single security of the relevant class having
the percentage interest specified in the prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified in the above list.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail, to each
securityholder of record at any time during such calendar year, a report setting
forth:
o the aggregate of the amounts for that calendar year reported
pursuant to the first two bullet points in the immediately
preceding list or, in the event that the recipient was a
securityholder of record only during a portion of the calendar
year, for the applicable portion of the year; and
o other customary information as may be deemed necessary or
desirable for securityholders to have in order to prepare
their tax returns.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a series of securities or with respect to the assets in the related trust
fund. Credit enhancement may take the form of one or more of the following:
o a limited financial guaranty policy issued by an entity named
in the related prospectus supplement,
o the subordination of one or more classes of the securities of
that series,
o the establishment of one or more reserve accounts,
o the use of a cross-support feature,
47
o a pool insurance policy, bankruptcy bond, special hazard
insurance policy, surety bond, letter of credit, guaranteed
investment contract, or
o any other method of credit enhancement described in the
related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the securities and
interest. If losses occur which exceed the amount covered by the credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of deficiencies.
SUBORDINATION
If specified in the related prospectus supplement, protection afforded
to holders of one or more classes of the senior securities of a series by means
of the subordination feature will be accomplished by the holders of one or more
other classes of that series having a preferential right to distributions in
respect of scheduled principal, principal prepayments, interest or any
combination thereof that otherwise would have been payable to the holders of one
or more other subordinated classes of securities of that series under the
circumstances and to the extent specified in the prospectus supplement. If
specified in the related prospectus supplement, protection may also be afforded
to the holders of the senior securities of a series by:
o reducing the ownership interest of the holders of the related
subordinated securities,
o a combination of the subordination feature and reducing the
ownership interest of the subordinated securityholders, or
o as otherwise described in the related prospectus supplement.
If specified in the related prospectus supplement, delays in receipt of
scheduled payments on the loans and losses on defaulted loans will be borne
first by the various classes of subordinated securities and thereafter by the
various classes of senior securities, in each case under the circumstances and
subject to the limitations specified in that prospectus supplement.
48
The related prospectus supplement may also limit the following:
o the aggregate distributions in respect of delinquent payments
on the loans over the lives of the securities or at any time,
o the aggregate losses in respect of defaulted loans which must
be borne by the subordinated securities by virtue of their
subordination, and
o the amount of the distributions otherwise distributable to the
subordinated securityholders that will be distributable to
senior securityholders on any distribution date.
If aggregate distributions in respect of delinquent payments on the loans or
aggregate losses in respect of the loans were to exceed the amount specified in
the related prospectus supplement, holders of the senior securities would
experience losses on their securities.
In addition to or in lieu of the foregoing, if specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
holders of the subordinated securities on any distribution date may instead be
deposited into one or more reserve accounts established with the trustee. The
related prospectus supplement may specify that deposits in any reserve account
may be made
o on each distribution date,
o for specified periods, or
o until the balance in the reserve account has reached a
specified amount and, following payments from the reserve
account to holders of the senior securities or otherwise,
thereafter to the extent necessary to restore the balance in
the reserve account to the specified level.
If specified in the related prospectus supplement, amounts on deposit in the
reserve account may be released to the holders of the class or classes of
securities specified in the prospectus supplement at the times and under the
circumstances specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of
senior securities and subordinated securities may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated securities, respectively, through a cross-support mechanism or
otherwise.
As among classes of senior securities and as among classes of
subordinated securities, distributions may be allocated among these classes as
follows:
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events or otherwise,
49
in each case as specified in the related prospectus supplement. As among classes
of subordinated securities, the related prospectus supplement will specify the
allocation of payments to holders of the related senior securities on account of
delinquencies or losses and the allocation payments to any reserve account.
POOL INSURANCE POLICIES
The related prospectus supplement may specify that a separate pool
insurance policy will be obtained for the pool. This policy will be issued by
the pool insurer named in the prospectus supplement. Subject to the limits
described in this section, each pool insurance policy will cover loss by reason
of default in payment on loans in the related pool in an amount equal to a
percentage, which is specified in the related prospectus supplement, of the
aggregate principal balances of the loans on the cut-off date which are not
covered as to their entire outstanding principal balances by primary mortgage
insurance policies. As more fully described in the following paragraph, the
master servicer will present claims to the pool insurer on behalf of itself, the
trustee and the securityholders. However, the pool insurance policies are not
blanket policies against loss, since claims under the policies may only be made
respecting particular defaulted loans and only upon satisfaction of the
conditions precedent described in the following paragraph. Unless otherwise
specified in the related prospectus supplement, no pool insurance policy will
cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy.
Unless otherwise specified in the related prospectus supplement, the
pool insurance policy will provide that no claims may be validly presented
unless the following conditions are satisfied:
o any required primary mortgage insurance policy is in effect
for the defaulted loan and a claim under that policy has been
submitted and settled;
o hazard insurance on the related mortgaged property has been
kept in force and real estate taxes and other protection and
preservation expenses have been paid;
o if there has been physical loss or damage to the mortgaged
property, the property has been restored to its physical
condition, reasonable wear and tear excepted, at the time of
issuance of the policy; and
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens except certain
permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
EITHER
o to purchase the property securing the defaulted loan at a
price equal to the loan's principal balance plus accrued and
unpaid interest at the loan rate to the date of purchase plus
certain expenses incurred by the master servicer on behalf of
the trustee and securityholders, OR
o to pay the amount by which the sum of the principal balance of
the defaulted loan plus accrued and unpaid interest at the
loan rate to the date of payment of the claim
50
and the aforementioned expenses exceeds the proceeds received
from an approved sale of the mortgaged property,
in either case net of amounts paid or assumed to have been paid under the
related primary mortgage insurance policy.
If any property securing a defaulted loan is damaged and proceeds, if
any, from the related hazard insurance policy or any applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines that
o the restoration will increase the proceeds to securityholders
on liquidation of the related loan after reimbursement to the
master servicer of its expenses, and
o the master servicer will be able to recover its expenses from
proceeds of the sale of the property or proceeds of the
related pool insurance policy or any related primary mortgage
insurance policy.
Unless otherwise specified in the related prospectus supplement, no
pool insurance policy will insure against losses sustained by reason of a
default arising, among other things, from
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or
persons involved in the origination of the loan, or
o failure to construct a mortgaged property in accordance with
plans and specifications.
Many primary mortgage insurance policies also do not insure against these types
of losses. Nevertheless, a failure of coverage attributable to one of the
foregoing events might result in a breach of the related seller's
representations and, in that event, might give rise to an obligation on the part
of the seller to purchase the defaulted loan if the breach cannot be cured. No
pool insurance policy will cover a claim in respect of a defaulted loan that
occurs when the loan's servicer, at the time of default or thereafter, was not
approved by the insurer. Many primary mortgage insurance policies also do not
cover claims in this case.
Unless otherwise specified in the related prospectus supplement, the
original amount of coverage under the pool insurance policy will be reduced over
the life of the related securities by the aggregate dollar amount of claims
paid, less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the master servicer as well as accrued interest on
delinquent loans to the date of payment of the claim, unless otherwise specified
in the related prospectus supplement. Accordingly, if aggregate net claims paid
under any pool insurance policy reach the original policy limit, coverage under
that pool insurance policy will be exhausted and any further losses will be
borne by the securityholders.
51
The terms of any pool insurance policy relating to a pool of
Manufactured Housing Contracts or Home Improvement Contracts will be described
in the related prospectus supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related prospectus supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. These mortgage loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time the loan was originated.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by the Department of Housing and Urban Development
(HUD), or by the master servicer or any sub-servicer, and are paid to the FHA.
The regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged property to HUD or
upon assignment of the defaulted mortgage loan to HUD. With respect to a
defaulted FHA-insured Single Family Loan, the master servicer or any
sub-servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined by the master servicer or sub-servicer or HUD that the default
was caused by circumstances beyond the mortgagor's control, the master servicer
or such sub-servicer is expected to make an effort to avoid foreclosure by
entering, if feasible, into one of a number of available forms of forbearance
plans with the mortgagor. These plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with such payments to be made
up on or before the maturity date of the mortgage, or the recasting of payments
due under the mortgage up to or beyond the maturity date. In addition, when this
type of default is accompanied by certain other criteria, HUD may provide relief
by making payments to the master servicer or sub-servicer in partial or full
satisfaction of amounts due under the mortgage loan or by accepting assignment
of the loan from the master servicer or sub-servicer. Any payments made by HUD
are to be repaid by the mortgagor to HUD. With certain exceptions, at least
three full monthly installments must be due and unpaid under the mortgage loan,
and HUD must have rejected any request for relief from the mortgagor, before the
master servicer or sub-servicer may initiate foreclosure proceedings.
In most cases, HUD has the option to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash. Claims have
not been paid in debentures since 1965. HUD debentures issued in satisfaction of
FHA insurance claims bear interest at the applicable HUD debentures' interest
rate. The master servicer or sub-servicer of each FHA-insured Single Family Loan
will be obligated to purchase any HUD debenture issued in satisfaction of a
mortgage loan upon default for an amount equal to the debenture's principal
amount.
52
The amount of insurance benefits paid by the FHA generally is equal to
the entire unpaid principal amount of the defaulted mortgage loan adjusted to
reimburse the master servicer or sub-servicer for certain costs and expenses and
to deduct certain amounts received or retained by the master servicer or
sub-servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
property to HUD, the master servicer or sub-servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to the conveyance date generally only to the extent
allowed pursuant to the related forbearance plan approved by HUD. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured Single Family Loan, bears interest from the date
which is 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the mortgage loan and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case at
the same interest rate as the applicable HUD debenture interest rate.
Single Family Loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended, which permits a veteran, the
spouse of a veteran in certain cases, to obtain a mortgage loan guaranteed by
the VA covering financing of the purchase of a one- to four-family dwelling unit
at interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no Single Family Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for that mortgage loan.
The maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 U.S.C. Section 1803(a), as amended. As
of November 1, 1998 the maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,570. The liability on the
guarantee is reduced or increased, pro rata, with any reduction or increase in
the amount of indebtedness, but in no event will the amount payable under the
guaranty exceed the amount of the original guaranty. The VA may, at its option
and without regard to the guaranty, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage loan upon the loan's assignment to the
VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the
master servicer or sub-servicer is, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim under the guaranty is submitted after
liquidation of the mortgaged property.
The amount payable under the guaranty will be the percentage of the
VA-guaranteed Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that these amounts have not been recovered through
liquidation of the
53
mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the pool and will be issued by the
special hazard insurer named in the prospectus supplement. Subject to the
limitations described in the immediately following sentence, each special hazard
insurance policy will protect holders of the related securities from
o loss by reason of damage to mortgaged properties caused by
certain hazards -including earthquakes and, to a limited
extent, tidal waves and related water damage or as otherwise
specified in the prospectus supplement - not insured against
under the standard form of hazard insurance policy for the
respective states in which the mortgaged properties are
located or under a flood insurance policy if the mortgaged
property is located in a federally designated flood area, and
o loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies.
SEE "Operative Agreements--Hazard Insurance" in this prospectus. No special
hazard insurance policy will cover losses occasioned by fraud or conversion by
the trustee or master servicer, war, insurrection, civil war, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear or chemical reaction, flood (if the
mortgaged property is located in a federally designated flood area), nuclear or
chemical contamination and certain other risks. The amount of coverage under any
special hazard insurance policy will be specified in the related prospectus
supplement. Each special hazard insurance policy will provide that no claim may
be paid unless hazard insurance and, if applicable, flood insurance on the
related mortgaged property have been kept in force and other protection and
preservation expenses have been paid.
Subject to the limitations set forth in the immediately preceding
paragraph, and unless otherwise specified in the related prospectus supplement,
each special hazard insurance policy will provide coverage where there has been
damage to property securing a foreclosed mortgage loan, and title to the
mortgaged property has been acquired by the insured, to the extent that the
damage is not covered by the hazard insurance policy or flood insurance policy,
if any, maintained by the borrower or the master servicer. In this circumstance,
the special hazard insurer will pay the LESSER of
o the cost to repair or replace the mortgaged property, and
o upon transfer of the property to the special hazard insurer,
the unpaid principal balance of the loan at the time the
property is acquired by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim
settlement, together with certain expenses incurred by the
master servicer with respect to the property.
If the unpaid principal balance of a loan plus accrued interest and certain
servicing expenses are paid by the special hazard insurer, the amount of further
coverage under the related special
54
hazard insurance policy will be reduced by that amount less any net proceeds
from the sale of the property. Any amount paid as the cost to repair the damaged
property will also reduce coverage by such amount. So long as a pool insurance
policy remains in effect, the payment by the special hazard insurer to cover the
unpaid principal balance of a loan plus accrued interest and certain servicing
expenses or to cover the cost to repair a mortgaged property will not affect the
total insurance proceeds paid to securityholders, but will affect the relative
amounts of coverage remaining under the special hazard insurance policy and the
pool insurance policy.
Since each special hazard insurance policy will be designed to permit
full recovery under the mortgage pool insurance policy in circumstances in which
recoveries would otherwise be unavailable because mortgaged properties have been
damaged by a cause not insured against by a standard hazard policy and thus
would not be restored, each operative agreement will provide that, unless
otherwise specified in the related prospectus supplement, the master servicer
will be under no obligation to maintain the special hazard insurance policy once
the related pool insurance policy has been terminated or been exhausted due to
payment of claims.
To the extent specified in the related prospectus supplement, the
master servicer may deposit in a special trust account, cash, an irrevocable
letter of credit or any other instrument acceptable to each rating agency named
in the prospectus supplement, in order to provide protection in lieu of or in
addition to that provided by a special hazard insurance policy. The amount of
any special hazard insurance policy or of the deposit to the special trust
account relating to securities may be reduced so long as the reduction will not
result in a downgrading of the rating of the securities by any rating agency
named in the prospectus supplement.
The terms of any special hazard insurance policy relating to a pool of
Manufactured Housing Contracts or Home Improvement Contracts will be described
in the related prospectus supplement.
BANKRUPTCY BONDS
If specified in the related prospectus supplement, a bankruptcy bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in the prospectus supplement. Each bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a loan or a reduction by the court of the principal
amount of a loan. The bankruptcy bond will also cover unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under any bankruptcy bond will be set
forth in the related prospectus supplement. Coverage under a bankruptcy bond may
be cancelled or reduced by the master servicer if the cancellation or reduction
would not adversely affect the then current rating of the securities by any
rating agency named in the prospectus supplement. SEE "Material Legal Aspects of
the Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on
Lenders" in this prospectus.
To the extent specified in the related prospectus supplement, the
master servicer may deposit in a special trust account, cash, an irrevocable
letter of credit or any other instrument acceptable to each rating agency named
in the prospectus supplement, to provide protection in lieu of or in addition to
that provided by a bankruptcy bond. The amount of any bankruptcy
55
bond or of the deposit to the special trust account relating to the securities
may be reduced so long as the reduction would not result in a downgrading of the
rating of the securities by any rating agency named in the prospectus
supplement.
The terms of any bankruptcy bond relating to a pool of Manufactured
Housing Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the National Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of mortgage loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of a mortgage loan may be up to 40 years and the ratio of loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the National Housing Act allows HUD to insure
mortgage loans made for the purchase or refinancing of existing apartment
projects which are at least three years old. Section 244 also provides for
co-insurance of mortgage loans made under Section 223(f). Under Section 223(f),
the loan proceeds cannot be used for substantial rehabilitation work but repairs
may be made for, generally up to the greater of 15% of the value of the project
or a dollar amount per apartment unit established from time to time by HUD. In
general the loan term may not exceed 35 years and a loan-to-value ratio of no
more than 85% is required for the purchase of a project and a loan-to-value
ratio of no more than 70% for the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. The insurance does not cover 100% of the mortgage loan
but is subject to certain deductions and certain losses of interest from the
date of the default.
RESERVE ACCOUNTS
If specified in the related prospectus supplement, credit support with
respect to a series of securities may be provided by the establishment and
maintenance of one or more reserve accounts for that series, in trust, with the
related trustee. The prospectus supplement will specify whether or not a reserve
accounts will be included in the related trust fund.
The reserve account for a series of securities will be funded in one of
the following ways:
o by a deposit of cash, U.S. Treasury securities, instruments
evidencing ownership of principal or interest payments on U.S.
Treasury securities, letters of credit, demand notes,
securities of deposit or a combination of these, in the
aggregate amount specified in the related prospectus
supplement;
o by deposit from time to time of amounts specified in the
related prospectus supplement to which the subordinated
securityholders, if any, would otherwise be entitled; or
56
o in such other manner as the prospectus supplement may specify.
Any amounts on deposit in the reserve account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
permitted investments. Unless otherwise specified in the related prospectus
supplement, "permitted investments" will include obligations of the United
States and certain of its agencies, certificates of deposit, certain commercial
paper, time deposits and bankers acceptances sold by eligible commercial banks
and certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the trustee,
the letter of credit will be irrevocable. Unless otherwise specified in the
related prospectus supplement, any instrument deposited in a reserve account
will name the trustee, in its capacity as trustee for the securityholders, as
beneficiary and will be issued by an entity acceptable to each rating agency
named in the prospectus supplement. Additional information with respect to
instruments deposited in the reserve account will be set forth in the related
prospectus supplement.
Any amounts deposited, and payments on instruments deposited, in a
reserve account will be available for withdrawal from the reserve account for
distribution to securityholders, for the purposes, in the manner and at the
times specified in the related prospectus supplement.
CROSS SUPPORT
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be evidenced
by separate classes of securities. In this case, credit support may be provided
by a cross support feature which requires that distributions be made with
respect to securities evidencing a beneficial ownership interest in, or secured
by, other asset groups within the same trust fund. The related prospectus
supplement for a series which includes a cross support feature will describe the
manner and conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided and the application of the
coverage to the identified trust funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
If specified in the related prospectus supplement, a trust fund may
also include insurance, guaranties, surety bonds, letters of credit or similar
arrangements for the following purposes:
o to maintain timely payments or provide additional protection
against losses on the assets included in the trust fund,
o to pay administrative expenses, or
o to establish a minimum reinvestment rate on the payments made
in respect of the assets included in the trust fund or
principal payment rate on the assets.
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These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the prospectus supplement.
FINANCIAL INSTRUMENTS
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
o to convert the payments on some or all of the assets from
fixed to floating payments, or from floating to fixed, or from
floating based on a particular index to floating based on
another index;
o to provide payments in the event that any index rises above or
falls below specified levels; or
o to provide protection against interest rate changes, certain
types of losses, including reduced market value, or other
payment shortfalls to one or more classes of the related
series.
If a trust fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the certificates
will be affected primarily by the amount and timing of principal payments
received on or in respect of the assets included in the related trust fund. The
original terms to maturity of the loans in a given pool will vary depending upon
the types of loans included. Each prospectus supplement will contain information
with respect to the types and maturities of the loans in the related pool.
Unless otherwise specified in the related prospectus supplement, loans may be
prepaid, without penalty, in full or in part at any time. Multifamily Loans may
prohibit prepayment for a specified period after origination, may prohibit
partial prepayments entirely, and may require the payment of a prepayment
penalty upon prepayment in full or in part. The prepayment experience of the
loans in a pool will affect the life of the related series of securities.
The rate of prepayments on the loans cannot be predicted. A number of
factors, including homeowner mobility, economic conditions, the presence and
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds may affect the prepayment experience of loans.
Some of these factors, as well as other factors including limitations on
prepayment and the relative tax benefits associated with the ownership of
income-producing real property, may affect the prepayment experience of
Multifamily Loans.
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Home Equity Loans and Home Improvement Contracts have been originated
in significant volume only during the past few years and neither depositor is
aware of any publicly available studies or statistics on the rate of prepayment
of these types of loans. Generally, Home Equity Loans and Home Improvement
Contracts are not viewed by borrowers as permanent financing. Accordingly, these
loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because Home Equity Loans that are revolving credit
line loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgages. The prepayment
experience of the related trust fund may also be affected by the frequency and
amount of any future draws on any revolving credit line loans. Other factors
that might be expected to affect the prepayment rate of a pool of Home Equity
Loans or Home Improvement Contracts include the amounts of, and interest rates
on, the underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and junior mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles. Accordingly,
these types of loans may experience a higher rate of prepayment than traditional
fixed-rate mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on Home Equity Loans for federal income
tax purposes may further increase the rate of prepayments of these loans.
Collections on Home Equity Loans that are revolving credit line loans
may vary because, among other things, borrowers may
o make payments during any month as low as the minimum monthly
payment for that month or, during the interest-only period for
revolving credit line loans and, in more limited
circumstances, closed-end loans, as to which an interest-only
payment option has been selected, the interest and the fees
and charges for that month; or
o make payments as high as the entire outstanding principal
balance plus accrued interest and related fees and charges.
It is possible that borrowers may fail to make the required periodic payments.
In addition, collection on these loans may vary due to seasonal purchasing and
the payment habits of borrowers.
Unless otherwise provided in the related prospectus supplement, all
conventional loans other than Multifamily Loans will contain due-on-sale
provisions permitting the mortgagee or holder of the contract to accelerate the
maturity of the related loan upon the sale or certain other transfers of the
related mortgaged property by the borrower. As described in the related
prospectus supplement, conventional Multifamily Loans may contain due-on-sale
provisions, due-on-encumbrance provisions or both. Loans insured by the FHA, and
loans partially guaranteed by the VA, are assumable with the consent of the FHA
and the VA, respectively. Thus, the rate of prepayments of these loans may be
lower than that of conventional mortgage loans bearing comparable interest
rates. Unless otherwise provided in the related prospectus supplement, the
master servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the mortgaged
property and reasonably believes
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that it is entitled to do so under applicable law. However, the master servicer
will not take any enforcement action that would impair or threaten to impair any
recovery under any related insurance policy. SEE "Operative
Agreements--Collection Procedures" and "Material Legal Aspects of the Mortgage
Loans" in this prospectus for a description of certain provisions of each
operative agreement and certain legal matters that may affect the prepayment
experience of the loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, prepayment rates may be influenced by
a variety of economic, geographic, social and other factors, including changes
in housing needs, job transfers, unemployment and servicing decisions. In
general, however, if prevailing rates fall significantly below the loan rate
borne by a loan, that loan is likely to be subject to a higher prepayment rate
than would be the case if prevailing interest rates remain at or above its rate.
Conversely, if prevailing interest rates rise appreciably above the loan rate
borne by a loan, that loan is likely to experience a lower prepayment rate than
would be the case if prevailing rates remain at or below its loan rate. However,
there can be no assurance that these generalities will hold true in particular
cases. The rate of prepayment of Multifamily Loans may also be affected by other
factors including loan terms including the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment changes, relative
economic conditions in the area where the mortgaged properties are located, the
quality of management of the mortgaged properties and possible changes in tax
laws.
When a loan is prepaid in full, the borrower is charged interest on the
principal amount of the loan only for the number of days in the month actually
elapsed up to the date of the prepayment rather than for a full month. Unless
otherwise specified in the related prospectus supplement, the effect of a
prepayment in full will be to reduce the amount of interest passed through in
the following month to securityholders, because interest on the principal
balance of the prepaid loan will be paid only to the date of prepayment. Partial
prepayments in a given month may be applied to the outstanding principal
balances of the prepaid loans either on the first day of the month of receipt or
of the month following receipt. In the latter case, partial prepayments will not
reduce the amount of interest passed through in that month. Unless otherwise
specified in the related prospectus supplement, neither prepayments in full nor
partial prepayments will be passed through until the month following receipt.
Prepayment charges collected with respect to Multifamily Loans will be
distributed to securityholders, or to other persons entitled to them, as
described in the related prospectus supplement.
If so specified in the related prospectus supplement, the master
servicer will be required to remit to the trustee, with respect to each loan in
the related trust as to which a principal prepayment in full or a principal
payment which is in excess of the scheduled monthly payment and is not intended
to cure a delinquency was received during any due period, an amount, from and to
the extent of amounts otherwise payable to the master servicer as servicing
compensation, equal to the EXCESS, if any, of
o 30 days' interest on the principal balance of the related loan
at the loan rate net of the annual rate at which the master
servicer's servicing fee accrues, OVER
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o the amount of interest actually received on that loan during
the due period, net of the master servicer's servicing fee.
If the rate at which interest is passed through to the holders of
securities of a series is calculated on a loan by loan basis, disproportionate
principal prepayments with respect to loans bearing different loan rates will
affect the yield on the securities. In general, the effective yield to
securityholders will be slightly lower than the yield otherwise produced by the
applicable security pass-through rate and purchase price because, while interest
generally will accrue on each loan from the first day of the month, the
distribution of interest generally will not be made earlier than the month
following the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any other person named in the related
prospectus supplement may have the option to purchase the assets of a trust fund
to effect early retirement of the related series of securities. SEE "Operative
Agreements--Termination; Optional Termination; Optional Calls" in this
prospectus.
Factors other than those identified in this prospectus and in the
related prospectus supplement could significantly affect principal prepayments
at any time and over the lives of the securities. The relative contribution of
the various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal of trust fund assets
at any time or over the lives of the securities.
The prospectus supplement relating to a series of securities will
discuss in greater detail the effect of the rate and timing of principal
payments including prepayments, delinquencies and losses on the yield, weighted
average lives and maturities of the securities.
In the event that a receiver, bankruptcy trustee, debtor in possession
or similar entity (each, an "insolvency trustee") is appointed with respect to a
seller due to its insolvency or a seller becomes a debtor under the federal
Bankruptcy Code or any similar insolvency law, the insolvency trustee may
attempt to characterize the transfer of the related mortgage loans from the
seller to the depositor as a pledge to secure a financing rather than as a sale.
In the event that this attempt were successful, the insolvency trustee might
elect, among other remedies, to accelerate payment of the related securities and
liquidate the related loans, with each securityholder being entitled to receive
its allocable share of the principal balance of the loans, together with its
allocable share of interest on the loans at the applicable pass-through rate, or
weighted average "strip rate" as defined in the related prospectus supplement,
as the case may be, to the date of payment. In this event, the related
securityholders might incur reinvestment losses with respect to principal
received and investment losses attendant to the liquidation of the loans and the
resulting early retirement of the related security. In addition, certain delays
in distributions might be experienced by the securityholders in connection with
any such insolvency proceedings.
OPERATIVE AGREEMENTS
Set forth below is a summary of the material provisions of each
operative agreement that are not described elsewhere in this prospectus. This
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of each operative
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agreement applicable to a particular series of certificates. Where particular
provisions or terms used in the operative agreements are referred to, those
provisions or terms are as specified in the agreements. Except as otherwise
specified, the operative agreements described in this prospectus contemplate a
trust fund that is comprised of loans. Although an agreement governing a trust
fund that consists of Agency Securities or Private Label Securities may contain
provisions that are similar to those described below, they will be described
more fully in the related prospectus supplement.
ASSIGNMENT OF TRUST FUND ASSETS
ASSIGNMENT OF THE TRUST FUND LOANS. When the securities of a series are
issued, the depositor named in the prospective supplement will cause the loans
comprising the related trust fund to be assigned to the trustee, together with
all principal and interest received by or on behalf of the depositor with
respect to those loans after the cut-off date, other than principal and interest
due on or before the cut-off date and other than any retained interest specified
in the related prospectus supplement. Concurrently with this assignment, the
trustee will deliver the securities to the depositor in exchange for the loans.
Each loan will be identified in a schedule appearing as an exhibit to the
related agreement. The schedule will include information as to the outstanding
principal balance of each loan after application of payments due on the cut-off
date, as well as information regarding the loan rate or APR, the current
scheduled monthly payment of principal and interest, the maturity of the loan,
its loan-to-value ratio or combined loan-to-value ratio at origination and
certain other information.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. (MERS), assignments of the mortgages for some or all
of the mortgage loans in the related trust will be registered electronically
through the MERS(R) System. With respect to mortgage loans registered through
the MERS(R) System, MERS shall serve as mortgagee of record solely as a nominee
in an administrative capacity on behalf of the trustee and shall not have any
interest in any of those mortgage loans.
In addition, the depositor will deliver to the trustee or a custodian
the following items in connection with each loan in the related trust fund:
o the original mortgage note or contract, endorsed without
recourse in blank or to the order of the trustee;
o in the case of Single Family Loans, Home Equity Loans or
Multifamily Loans, the mortgage, deed of trust or similar
instrument (each, a "mortgage") with evidence of recording
indicated on the mortgage; however, in the case of any
mortgage not returned from the public recording office, the
depositor will deliver or cause to be delivered a copy of the
mortgage together with a certificate stating that the original
mortgage was delivered to the recording office;
o in the case of a contract, other than an unsecured contract,
the security interest in the mortgaged property securing the
contract;
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o an assignment of the mortgage or contract to the trustee,
which assignment will be in recordable form in the case of a
mortgage assignment or evidence that the mortgage is held for
the trustee through the MERS(R) System; and
o any other security documents as may be specified in the
related prospectus supplement, including those relating to any
senior lienholder interests in the related mortgaged property.
Unless otherwise specified in the related prospectus supplement, the
depositor will promptly cause the assignments of any Single Family Loan, Home
Equity Loan and Multifamily Loan (except for mortgages held under the MERS(R)
System) to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to the
trustee, recording is not required to protect the trustee's interest in the
loans against the claim of any subsequent transferee or any successor to, or
creditor of, the depositor or the originator of the loans. Unless otherwise
specified in the related prospectus supplement, the depositor will promptly make
or cause to be made an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
With respect to any loans which are cooperative loans, the depositor
will deliver the following items to the trustee:
o the related original cooperative note endorsed, without
recourse, in blank or to the order of the trustee,
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o an executed financing agreement and the relevant stock
certificate,
o related blank stock powers, and
o any other document specified in the related prospectus
supplement.
The depositor will cause to be filed in the appropriate office an assignment and
a financing statement evidencing the trustee's security interest in each
cooperative loan.
The trustee or custodian will review the mortgage loan documents, upon
receipt, within the time period specified in the related prospectus supplement.
The trustee will hold the documents in trust for the benefit of the
securityholders. Unless otherwise specified in the related prospectus
supplement, if any of these documents are found to be missing or defective in
any material respect, the trustee or custodian will notify the master servicer
and the depositor, and the master servicer will notify the related seller. If
the seller cannot cure the omission or defect within a specified member of days
after receipt of notice, the seller will be obligated either to purchase the
loan from the trustee or to substitute a qualified substitute loan for the
defective loan. There can be no assurance that a seller will fulfill this
obligation. Although the master
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servicer may be obligated to enforce the seller's obligation to the extent
described in this prospectus under "Mortgage Loan Program--Representations by
Sellers; Repurchases", neither the master servicer nor the depositor will be
obligated to purchase the mortgage loan if the seller defaults on its
obligation, unless the breach also constitutes a breach of the representations
or warranties of the master servicer or the depositor, as the case may be.
Unless otherwise specified in the related prospectus supplement, the seller's
obligation to cure, purchase or substitute constitutes the sole remedy available
to the securityholders or the trustee for the omission of, or a material defect
in, a constituent loan document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the agreement. Upon a breach of any representation of the
master servicer which materially and adversely affects the interests of the
securityholders in a loan, the master servicer will be obligated either to cure
the breach in all material respects or to purchase the loan. Unless otherwise
specified in the related prospectus supplement, this obligation to cure,
purchase or substitute constitutes the sole remedy available to the
securityholders or the trustee for a breach of representation by the master
servicer.
Notwithstanding the provisions of the foregoing two paragraphs, with
respect to a trust fund for which a REMIC election is to be made, unless the
related prospectus supplement otherwise provides, no purchase or substitution of
a loan will be made if the purchase or substitution would result in a prohibited
transaction tax under the Internal Revenue Code.
ASSIGNMENT OF AGENCY SECURITIES. The applicable depositor will cause
any Agency Securities included in a trust fund to be registered in the name of
the trustee or its nominee, and the trustee concurrently will execute,
countersign and deliver the securities. Each Agency Security will be identified
in a schedule appearing as an exhibit to the related pooling and servicing
agreement, which will specify as to each Agency Security its original principal
amount, outstanding principal balance as of the cut-off date, annual
pass-through rate, if any, and the maturity date.
ASSIGNMENT OF PRIVATE LABEL SECURITIES. The applicable depositor will
cause any Private Label Securities included in a trust fund to be registered in
the name of the trustee. The trustee or custodian will have possession of any
Private Label Securities that are in certificated form. Unless otherwise
specified in the related prospectus supplement, the trustee will not be in
possession, or be assignee of record, of any assets underlying the Private Label
Securities. SEE "The Trust Fund--Private Label Securities." The Private Label
Securities will be identified in a schedule appearing as an exhibit to the
related agreement, which will specify the original principal amount, the
outstanding principal balance as of the cut-off date, the annual pass-through
rate or interest rate, the maturity date and other pertinent information for the
Private Label Securities conveyed to the trustee.
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PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each sub-servicer servicing a loan pursuant to a sub-servicing
agreement will establish and maintain a subservicing account which meets the
requirements and is otherwise acceptable to the master servicer. A sub-servicing
account must be established with a Federal Home Loan Bank or with a depository
institution (including the sub-servicer if it is a depository institution), the
accounts in which are insured by the Federal Deposit Insurance Corporation
(FDIC). If a sub-servicing account is maintained at an institution that is a
Federal Home Loan Bank or an FDIC-insured institution and, in either case, the
amount on deposit in the sub-servicing account exceeds the FDIC insurance
coverage amount, then such excess amount must be remitted to the master servicer
within one business day after receipt. In addition, the sub-servicer must
maintain a separate account for escrow and impound funds relating to the loans.
Each sub-servicer is required to deposit into its sub-servicing account on a
daily basis all amounts that it receives in respect of the loans described
immediately below under "--Sub-Servicing by Sellers", less its servicing or
other compensation. On or before the date specified in the sub-servicing
agreement, the sub-servicer will remit to the master servicer or the trustee all
funds held in the sub-servicing account with respect to the loans that are
required to be remitted. The sub-servicer is also required to advance, on the
scheduled remittance date, an amount corresponding to any monthly installment of
principal and interest, less its servicing or other compensation, on any loan
the payment of which was not received from the borrower. Unless otherwise
specified in the related prospectus supplement, this obligation of each
sub-servicer to advance continues up to and including the first of the month
following the date on which the related mortgaged property is sold at a
foreclosure sale or is acquired on behalf of the securityholders by deed in lieu
of foreclosure, or until the related loan is liquidated.
The master servicer will establish and maintain with respect to the
related trust fund a security account which is a separate account or accounts
for the collection of payments on the assets in the trust fund. Unless otherwise
specified in the related prospectus supplement, each security account shall meet
one of the requirements listed below.
o It must be maintained with a depository institution the debt
obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding
company, the obligations of which) are rated in one of the two
highest rating categories by each rating agency rating(s)
named in the prospectus supplement.
o It must be an account the deposits in which are fully insured
by the FDIC.
o It must be an account or accounts the deposits in which are
insured by the FDIC to its established limits and the
uninsured deposits in which are otherwise secured such that,
as evidenced by an opinion of counsel, the securityholders
have a claim with respect to the funds in the security account
or a perfected first priority security interest against any
collateral securing those funds that is superior to the claims
of any other depositors or general creditors of the depository
institution with which the security account is maintained.
o It must be an account otherwise acceptable to each rating
agency named in the prospectus supplement.
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The collateral eligible to secure amounts in the security account is limited to
United States government securities and other high-quality permitted
investments. A security account may be maintained as an interest-bearing account
or the funds held in the account may be invested pending each succeeding
distribution date in permitted investments. Unless otherwise specified in the
related prospectus supplement, the master servicer or its designee will be
entitled to receive any interest or other income earned on funds in the security
account as additional compensation and will be obligated to deposit in the
security account the amount of any loss immediately as realized. The security
account may be maintained with the master servicer or with a depository
institution that is an affiliate of the master servicer, provided that the
master servicer or its affiliate, as applicable, meets the standards set forth
above.
On a daily basis, the master servicer will deposit in the certificate
account for each trust fund, to the extent applicable and unless otherwise
specified in the related prospectus supplement and provided in the pooling and
servicing agreement, the following payments and collections received, or
advances made, by the master servicer or on its behalf subsequent to the cut-off
date, other than payments due on or before the cut-off date and exclusive of any
amounts representing a retained interest:
o all payments on account of principal, including principal
prepayments and, if specified in the related prospectus
supplement, prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of
applicable servicing compensation;
o Insurance Proceeds;
o Liquidation Proceeds;
o any net proceeds received on a monthly basis with respect to
any properties acquired on behalf of the securityholders by
foreclosure or deed in lieu of foreclosure;
o all proceeds of any loan or mortgaged property purchased by
the master servicer, the depositor, any sub-servicer or any
seller as described in this prospectus under "Loan
Program--Representations by Sellers; Repurchases or
Substitutions" or "--Assignment of Trust Fund Assets" above
and all proceeds of any loan repurchased as described in this
prospectus under "--Termination; Optional Termination" below;
o all payments required to be deposited in the security account
with respect to any deductible clause in any blanket insurance
policy described in this prospectus under "--Hazard Insurance"
below;
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held
in the security account made for the benefit of the master
servicer; and
o all other amounts required to be deposited in the security
account pursuant to the related agreement.
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PRE-FUNDING ACCOUNT
If so provided in the related prospectus supplement, the master
servicer will establish and maintain a pre-funding account in the name of the
trustee on behalf of the related securityholders into which the applicable
depositor will deposit the pre-funded amount on the related closing date. The
trustee will use the pre-funded amount to purchase subsequent loans from the
depositor from time to time during the funding period which generally runs from
the closing date to the date specified in the related prospectus supplement. At
the end of the funding period, any amounts remaining in the pre-funding account
will be distributed to the related securityholders in the manner and priority
specified in the related prospectus supplement as a prepayment of principal of
the related securities.
SUB-SERVICING OF LOANS
Each seller of a loan or any other servicing entity may act as the
sub-servicer for that loan pursuant to a sub-servicing agreement which will not
contain any terms inconsistent with the related operative agreement. While each
sub-servicing agreement will be a contract solely between the master servicer
and the related sub-servicer, the operative agreement pursuant to which a series
of securities is issued will provide that, the trustee or any successor master
servicer must recognize the sub-servicer's rights and obligations under the
sub-servicing agreement, if for any reason the master servicer for that series
is no longer the master servicer of the related loans.
With the approval of the master servicer, a sub-servicer may delegate
its servicing obligations to third-party servicers, but the sub-servicer will
remain obligated under its sub-servicing agreement. Each sub-servicer will be
required to perform the customary functions of a servicer of mortgage loans.
These functions generally include
o collecting payments from borrowers and remitting collections
to the master servicer;
o maintaining hazard insurance policies as described in this
prospectus and in any related prospectus supplement, and
filing and settling claims under those policies, subject in
certain cases to the master servicer's right to approve
settlements in advance;
o maintaining borrower escrow or impoundment accounts for
payment of taxes, insurance and other items required to be
paid by the borrower under the related loan;
o processing assumptions or substitutions, although, unless
otherwise specified in the related prospectus supplement, the
master servicer is generally required to enforce due-on-sale
clauses to the extent their enforcement is permitted by law
and would not adversely affect insurance coverage;
o attempting to cure delinquencies;
o supervising foreclosures;
o inspecting and managing mortgaged properties under certain
circumstances;
67
o maintaining accounting records relating to the loans; and
o to the extent specified in the related prospectus supplement,
maintaining additional insurance policies or credit support
instruments and filing and settling claims under them.
A sub-servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on loans, as described more fully in this
prospectus under "--Payments on Loans; Deposits to Security Account" above, and
in respect of certain taxes and insurance premiums not paid on a timely basis by
borrowers.
As compensation for its servicing duties, each sub-servicer will be
entitled to a monthly servicing fee, to the extent the scheduled payment on the
related loan has been collected, in the amount set forth in the related
prospectus supplement. Each sub-servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the note or related instruments. Each sub-servicer will be reimbursed by the
master servicer for certain expenditures which it makes, generally to the same
extent the master servicer would be reimbursed under the agreement. The master
servicer may purchase the servicing of loans if the sub-servicer elects to
release the servicing of the loans to the master servicer. SEE "--Servicing and
Other Compensation and Payment of Expenses" below.
Each sub-servicer may be required to agree to indemnify the master
servicer for any liability or obligation sustained by the master servicer in
connection with any act or failure to act by the sub-servicer in its servicing
capacity. Each sub-servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the master servicer.
Each sub-servicer will be required to service each loan pursuant to the
terms of its sub-servicing agreement for the entire term of the loan, unless the
sub-servicing agreement is earlier terminated by the master servicer or unless
servicing is released to the master servicer. The master servicer may terminate
a sub-servicing agreement without cause, upon written notice to the sub-servicer
in the manner specified in that sub-servicing agreement.
The master servicer may agree with a sub-servicer to amend a
sub-servicing agreement or, upon termination of the sub-servicing agreement, the
master servicer may act as servicer of the related loans or enter into new
sub-servicing agreements with other sub-servicers. If the master servicer acts
as servicer, it will not assume liability for the representations and warranties
of the sub-servicer which it replaces. Each sub-servicer must be a seller or
meet the standards for becoming a seller or have such servicing experience as to
be otherwise satisfactory to the master servicer and the depositor. The master
servicer will make reasonable efforts to have the new sub-servicer assume
liability for the representations and warranties of the terminated sub-servicer,
but no assurance can be given that an assumption of liability will occur. In the
event of an assumption of liability, the master servicer may in the exercise of
its business judgment, release the terminated sub-servicer from liability in
respect of such representations and warranties. Any amendments to a
sub-servicing agreement or new sub-servicing agreements may contain provisions
different from those which are in effect in the original sub-servicing
agreement. However, each sub-servicing
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agreement will provide that any amendment or new agreement may not be
inconsistent with or violate the original sub-servicing agreement.
COLLECTION PROCEDURES
The master servicer, directly or through one or more sub-servicers,
will make reasonable efforts to collect all payments called for under the loans
and will, consistent with each agreement and any mortgage pool insurance policy,
primary mortgage insurance policy, FHA insurance, VA guaranty and bankruptcy
bond or alternative arrangements, follow such collection procedures as are
customary with respect to loans that are comparable to the loans included in the
related trust fund. Consistent with the preceding sentence, the master servicer
may, in its discretion,
o waive any assumption fee, late payment or other charge in
connection with a loan; and
o to the extent not inconsistent with the coverage of the loan
by a pool insurance policy, primary mortgage insurance policy,
FHA insurance, VA guaranty or bankruptcy bond or alternative
arrangements, arrange with the borrower a schedule for the
liquidation of delinquencies running for no more than 125 days
after the applicable due date for each payment.
Both the sub-servicer and the master servicer remain obligated to make advances
during any period when an arrangement of this type is in effect.
In certain instances in which a mortgage loan is in default (or if
default is reasonably foreseeable), the master servicer may, acting in
accordance with procedures specified in the applicable pooling and servicing
agreement, permit certain modifications of the mortgage loan rather than
proceeding with foreclosure. Modifications of this type may have the effect of
reducing the mortgage rate, forgiving the payment of principal or interest or
extending the final maturity date of the mortgage loan. Any such modified
mortgage loan may remain in the related trust fund, and the reduction in
collections resulting from the modification may result in reduced distributions
of interest (or other amounts) on, or may extend the final maturity of, one or
more classes of the related securities. If no satisfactory arrangement can be
made for the collection of such delinquent payments, the master servicer will
continue to follow procedures specified in the applicable pooling and servicing
agreement. These procedures could result, among other possible outcomes, in the
sale of the delinquent mortgage loan by the master servicer on behalf of the
related trust fund.
Unless otherwise specified in the related prospectus supplement, in any
case in which property securing a loan has been, or is about to be, conveyed by
the borrower, the master servicer will, to the extent it has knowledge of the
conveyance or proposed conveyance, exercise its rights to accelerate the
maturity of the loan under any applicable due-on-sale clause, but only if the
exercise of its rights is permitted by applicable law and will not impair or
threaten to impair any recovery under any primary mortgage insurance policy. If
these conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce the due-on-sale clause, or if the loan is
insured by the FHA or partially guaranteed by the VA, the
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master servicer will enter into an assumption and modification agreement with
the person to whom such property has been or is about to be conveyed. Pursuant
to the assumption agreement, the transferee of the property becomes liable for
repayment of the loan and, to the extent permitted by applicable law, the
original borrower also remains liable on the loan. Any fee collected by or on
behalf of the master servicer for entering into an assumption agreement will be
retained by or on behalf of the master servicer as additional servicing
compensation. In the case of Multifamily Loans and unless otherwise specified in
the related prospectus supplement, the master servicer will agree to exercise
any right it may have to accelerate the maturity of a Multifamily Loan to the
extent it has knowledge of any further encumbrance of the related mortgaged
property effected in violation of any applicable due-on-encumbrance clause. SEE
"Material Legal Aspects of the Mortgage Loans--Due-on-Sale Clauses" in this
prospectus. In connection with any assumption, the terms of the original loan
may not be changed.
With respect to cooperative loans, any prospective purchaser of a
cooperative unit will generally have to obtain the approval of the board of
directors of the relevant cooperative before purchasing the shares and acquiring
rights under the related proprietary lease or occupancy agreement. SEE "Material
Legal Aspects of the Loans" in this prospectus. This approval is usually based
on the purchaser's income and net worth and numerous other factors. Although the
cooperative's approval is unlikely to be unreasonably withheld or delayed, the
need to acquire approval could limit the number of potential purchasers for
those shares and otherwise limit the trust fund's ability to sell and realize
the value of those shares.
In general, a "tenant-stockholder," as defined in Section 216(b)(2) of
the Internal Revenue Code, of a corporation that qualifies as a "cooperative
housing corporation" within the meaning of Section 216(b)(1) of the Code is
allowed a deduction for amounts paid or accrued within his taxable year to the
corporation representing his proportionate share of certain interest expenses
and real estate taxes allowable as a deduction under Section 216(a) of the Code
to the cooperative corporation under Sections 163 and 164 of the Code. In order
for a corporation to qualify under Section 216(b)(1) of the Code for the taxable
year in which these items are allowable as a deduction to the corporation,
Section 216(b)(1) requires, among other things, that at least 80% of the gross
income of the cooperative corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of
Section 216(b)(1) of the Code must be determined on a year-to-year basis.
Consequently, there can be no assurance that cooperatives relating to particular
cooperative loans will qualify under this section for any given year. In the
event that a cooperative fail to qualify for one or more years, the value of the
collateral securing the related cooperative loan could be significantly impaired
because no deduction would be allowable to tenant-stockholders under Section
216(a) of the Code with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Section 216(b)(1) of the Code, the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
HAZARD INSURANCE
The master servicer will require each borrower to maintain a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage customary for the type of mortgaged
property in the state where the property is located. This coverage will be in an
amount not less than the replacement value of the
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improvements or manufactured home securing the loan or the principal balance
owing on the loan, whichever is less. All amounts collected by the master
servicer under any hazard policy will be deposited in the related security
account, except for amounts to be applied to the restoration or repair of the
mortgaged property or released to the borrower in accordance with the master
servicer's normal servicing procedures. In the event that the master servicer
maintains a blanket policy insuring against hazard losses on all the loans
comprising part of a trust fund, it will conclusively be deemed to have
satisfied its obligation to maintain hazard insurance. A blanket policy may
contain a deductible clause, in which case the master servicer will be required
to deposit into the related security account from its own funds the amounts
which would have been deposited in the security account but for the deductible
clause. Any additional insurance coverage for mortgaged properties with respect
to a pool of Multifamily Loans will be specified in the related prospectus
supplement.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or manufactured
home securing a loan by fire, lightning, explosion, smoke, windstorm and hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the loans may
have been underwritten by different insurers under different state laws in
accordance with different applicable forms and therefore may not contain
identical terms and conditions, the basic policy terms are dictated by
respective state laws. In addition, most policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the mortgaged property
securing a loan is located in a federally designated special flood area at the
time of origination, the master servicer will require the borrower to obtain and
maintain flood insurance.
The hazard insurance policies covering mortgaged properties typically
contain a clause which have the effect of requiring the insured at all times to
carry insurance of a specified percentage -generally 80% to 90% - of the full
replacement value of the mortgaged property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of
o the actual cash value (generally defined as replacement cost
at the time and place of loss, less physical depreciation) of
the improvements damaged or destroyed, generally defined to
equal replacement cost at the time and place of the loss less
physical depreciation; and
o such proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost
of the improvements.
Since the amount of hazard insurance that the master servicer may cause to be
maintained on the improvements securing the loans will decline as the principal
balances owing on the loans decrease, and since improved real estate generally
has appreciated in value over time in the past, the effect of this requirement
may be that, in the event of a partial loss, hazard insurance
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proceeds will be insufficient to restore the damaged property fully. If
specified in the related prospectus supplement, a special hazard insurance
policy will be obtained to insure against certain of the uninsured risks
described. SEE "Credit Enhancement--Special Hazard Insurance Policies" in this
prospectus.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative dwelling or the
cooperative's building could significantly reduce the value of the collateral
securing the cooperative loan to the extent not covered by other credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY MORTGAGE INSURANCE POLICIES. To the extent specified in the
related prospectus supplement, the master servicer will maintain, or cause each
sub-servicer to maintain, in full force and effect, a primary mortgage insurance
policy with regard to each loan for which coverage is required. The master
servicer will not cancel or refuse to renew any primary mortgage insurance
policy in effect at the time of the initial issuance of a series of securities
that is required to be kept in force under the applicable agreement unless the
primary mortgage insurance policy that replaces the cancelled or nonrenewed
policy is maintained with an insurer whose claims-paying ability is sufficient
to maintain the current rating of the classes of securities of that series by
each rating agency named in the related prospectus supplement.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a primary mortgage insurance policy
covering a loan will consist of the insured percentage of the unpaid principal
amount of the covered loan, accrued and unpaid interest thereon and
reimbursement of certain expenses, less the following amounts:
o all rents or other payments collected or received by the
insured other than the proceeds of hazard insurance that are
derived from or in any way related to the mortgaged property,
o hazard insurance proceeds in excess of the amount required to
restore the mortgaged property and which have not been applied
to the payment of the loan,
o amounts expended but not approved by the issuer of the related
primary mortgage insurance policy,
o claim payments previously made by the primary insurer, and
o unpaid premiums.
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Primary mortgage insurance policies generally reimburse losses
sustained by reason of defaults in payments by borrowers. Primary mortgage
insurance policies do not insure against, and exclude from coverage, a loss
sustained by reason of a default arising from or involving the following
matters, among others:
o fraud or negligence in origination or servicing of the loan,
including misrepresentation by the originator, borrower or
other persons involved in the origination of the loan,
o failure to construct the related mortgaged property in
accordance with specified plans,
o physical damage to the mortgaged property and
o lack of approval by the primary mortgage insurance policy
insurer of the master servicer or sub-servicer to act as
servicer of the loan.
RECOVERIES UNDER A PRIMARY MORTGAGE INSURANCE POLICY. As conditions
precedent to the filing or payment of a claim under a primary mortgage insurance
policy covering a loan, the insured will be required
o to advance or discharge all hazard insurance policy premiums;
o to advance
- real estate property taxes,
- all expenses required to maintain the related
mortgaged property in at least as good a condition as
existed at the effective date of the policy, ordinary
wear and tear excepted,
- mortgaged property sales expenses,
- any outstanding liens on the mortgaged property (as
defined in the policy) and
- foreclosure costs, including court costs and
reasonable attorneys' fees,
in each case as necessary and approved in advance by the
primary mortgage insurance policy insurer;
o in the event of any physical loss or damage to the mortgaged
property, to have the mortgaged property restored and repaired
to at least as good a condition as existed at the effective
date of the policy, ordinary wear and tear excepted; and
o to tender to the primary mortgage insurance policy carrier
good and merchantable title to and possession of the mortgaged
property.
In those cases in which a loan is serviced by a sub-servicer, the
sub-servicer, on behalf of itself, the trustee and securityholders, will present
claims to the primary mortgage insurance
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policy carrier, and all collections under the policy will be deposited in the
sub-servicing account. In all other cases, the master servicer, on behalf of
itself, the trustee and the securityholders, will present claims to the carrier
of each primary mortgage insurance policy and will take such reasonable steps as
are necessary to receive payment or to permit recovery under the policy with
respect to defaulted loans. As set forth above, all collections by or on behalf
of the master servicer under any primary mortgage insurance policy and, when the
mortgaged property has not been restored, the hazard insurance policy are to be
deposited in the security account, subject to withdrawal as previously
described.
If the mortgaged property securing a defaulted loan is damaged and any
proceeds from the related hazard insurance policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any
related primary mortgage insurance policy, the master servicer is not required
to expend its own funds to restore the damaged property unless it determines
that
o the restoration will increase the proceeds to securityholders
upon liquidation of the loan after reimbursement of the master
servicer for its expenses, and
o the master servicer will be able to recover its expenses from
related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan is not available under the primary
mortgage insurance policy for the reasons set forth in the preceding paragraph,
or if the defaulted loan is not covered by a primary mortgage insurance policy,
the master servicer will be obligated to follow such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
loan. If the proceeds of any liquidation of the related mortgaged property are
less than the principal balance of the loan plus accrued interest that is
payable to securityholders, the trust fund will realize a loss in the amount of
that difference plus the amount of expenses that it incurred in connection with
the liquidation and that are reimbursable under the agreement. In the unlikely
event that proceedings result in a total recovery which, after reimbursement to
the master servicer of its expenses, is in excess of the principal balance of
the defaulted loan plus accrued interest that is payable to securityholders, the
master servicer will be entitled to withdraw or retain from the security account
amounts representing its normal servicing compensation with respect to that loan
and, unless otherwise specified in the related prospectus supplement, amounts
representing the balance of the excess amount, exclusive of any amount required
by law to be forwarded to the related borrower , as additional servicing
compensation.
If the master servicer or its designee recovers Insurance Proceeds
which, when added to any related Liquidation Proceeds and after deduction of
certain expenses reimbursable to the master servicer, exceed the principal
balance of the related loan plus accrued interest that is payable to
securityholders, the master servicer will be entitled to withdraw or retain from
the security account amounts representing its normal servicing compensation with
respect to that loan. In the event that the master servicer has expended its own
funds to restore the damaged mortgaged property and those funds have not been
reimbursed under the related hazard insurance policy, the master servicer will
be entitled to withdraw from the security account, out of related Liquidation
Proceeds or Insurance Proceeds, an amount equal to the expenses that it
incurred, in which event the trust fund may realize a loss up to the amount of
those expenses. Since
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Insurance Proceeds cannot exceed deficiency claims and certain expenses incurred
by the master servicer, no payment or recovery will result in a recovery to the
trust fund that exceeds the principal balance of the defaulted loan together
with accrued interest. SEE "Credit Enhancement" in this prospectus supplement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The master servicer's primary servicing compensation with respect to a
series of securities will come from the payment to it each month, out of each
interest payment on a loan, of an amount equal to the annual percentage
specified in the related prospectus supplement of the outstanding principal
balance of that loan. Since the master servicer's primary compensation is a
percentage of the outstanding principal balance of each mortgage loan, this
amount will decrease as the mortgage loans amortize. In addition to this primary
servicing compensation, the master servicer or the sub-servicers will be
entitled to retain all assumption fees and late payment charges to the extent
collected from borrowers and, if so provided in the related prospectus
supplement, any prepayment charges and any interest or other income which may be
earned on funds held in the security account or any sub-servicing account.
Unless otherwise specified in the related prospectus supplement, any
sub-servicer will receive a portion of the master servicer's primary
compensation as its sub-servicing compensation.
Unless otherwise specified in the related prospectus supplement, the
master servicer will pay from its servicing compensation, in addition to amounts
payable to any sub-servicer, certain expenses incurred in connection with its
servicing of the loans, including, without limitation
o payment of any premium for any insurance policy, guaranty,
surety or other form of credit enhancement as specified in the
related prospectus supplement;
o payment of the fees and disbursements of the trustee and
independent accountants;
o payment of expenses incurred in connection with distributions
and reports to securityholders; and
o payment of any other expenses described in the related
prospectus supplement.
EVIDENCE AS TO COMPLIANCE
Each operative agreement will provide that a firm of independent public
accountants will furnish a statement to the trustee, on or before a specified
date in each year, to the effect that, on the basis of the examination by the
firm conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced for Freddie
Mac, the servicing by or on behalf of the master servicer of loans, the Agency
Securities or the Private Label Securities, under agreements substantially
similar to one another (including the governing agreement), was conducted in
compliance with those agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced by Freddie Mac
requires it to report. In rendering this statement the accounting firm may rely,
as to matters relating to the direct servicing of mortgage loans, Agency
Securities or Private Label Securities by sub-servicers, upon comparable
statements of firms of independent public accountants
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rendered within one year with respect to the sub-servicers for examinations
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages Serviced for Freddie Mac.
Each operative agreement will also provide for delivery to the related
trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the master servicer to the effect that the master
servicer has fulfilled its obligations under the agreement throughout the
preceding year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by securityholders of the
related series without charge upon written request to the master servicer at the
address set forth in the related prospectus supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITORS
The master servicer under each operative agreement will be named in the
related prospectus supplement. The entity serving as master servicer may have
normal business relationships with the depositor or the depositor's affiliates.
Each operative agreement will provide that the master servicer may not
resign from its obligations and duties under the agreement except (i) upon a
determination that it is no longer permissible to perform them under applicable
law or (ii) if so provided in the related operative agreement, a determination
by the master servicer that it will no longer engage in the business of
servicing mortgage loans. In no event will the master servicer's resignation
become effective until the trustee or a successor servicer has assumed the
master servicer's obligations and duties under the agreement.
Each operative agreement will further provide that none of the master
servicer, the depositor or any director, officer, employee or agent of the
master servicer or of the depositor will be under any liability to the related
trust fund or the securityholders for any action taken, or for refraining from
the taking of any action, in good faith pursuant to the agreement, or for errors
in judgment. However, none of the master servicer, the depositor or any
director, officer, employee or agent of the master servicer or of the depositor
will be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of
duties under the agreement or by reason of reckless disregard of obligations and
duties under the agreement. Each operative agreement will further provide that
the master servicer, the depositor and any director, officer, employee or agent
of the master servicer or of the depositor will be entitled to indemnification
by the related trust fund and will be held harmless against any loss, liability
or expense incurred in connection with (i) any legal action relating to the
agreement or the securities or (ii) a breach of a representation or warranty
regarding the loan or loans, other than
o any loss, liability or expense related to any specific loan in
the trust fund or the loans in general except for any loss,
liability or expense otherwise reimbursable under the
agreement, and
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o any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of
duties under the agreement or by reason of reckless disregard
of obligations and duties under the agreement.
In addition to the foregoing, if so provided in the agreement, the
master servicer, the depositor and any director, officer, employee or agent of
the master servicer or of the depositor may be entitled to indemnification by
the related trust fund and may be held harmless against any loss, liability or
expense in connection with any actions taken under the agreement.
In addition, each operative agreement will provide that neither the
master servicer nor the depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its
responsibilities under the agreement and which, in its opinion, may involve it
in any expense or liability. However, the master servicer or the depositor may,
in its discretion, undertake any action which it may deem necessary or desirable
with respect to the agreement and the rights and duties of the parties and the
interests of the securityholders. In that event, the legal expenses and costs of
the action and any resulting liability will be expenses, costs and liabilities
of the trust fund, and the master servicer or the depositor, as the case may be,
will be entitled to reimbursement from funds otherwise distributable to
securityholders.
Any entity into which the master servicer may be merged or
consolidated, or any entity resulting from any merger or consolidation to which
the master servicer is a party, or any entity succeeding to the business of the
master servicer, will be the successor of the master servicer under each
agreement, provided that the successor entity is qualified to sell loans to, and
service loans on behalf of, Fannie Mae or Freddie Mac and that the merger,
consolidation or succession does not adversely affect the then current rating of
the securities rated by each rating agency named in the related prospectus
supplement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Unless otherwise
specified in the related prospectus supplement, the following will be deemed
"events of default" under each agreement:
o any failure by the master servicer to distribute to security
holders of any class any required payment - other than an
advance - which failure continues unremedied for five business
days after the giving of written notice to the master servicer
by the trustee or the depositor, or to the master servicer,
the depositor and the trustee by the holders of securities of
that class evidencing not less than 25% of the aggregate
percentage interests evidenced by that class;
o any failure by the master servicer to make an advance as
required under the agreement, unless cured as specified in the
agreement;
o any failure by the master servicer duly to observe or perform
in any material respect any of its other covenants or
agreements in the agreement, which failure continues
unremedied for a specified number of days after the giving of
written notice of the failure to the master servicer by the
trustee or the depositor, or to the master servicer,
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the depositor and the trustee by the holders of securities of
any class evidencing not less than 25% of the aggregate
percentage interests constituting that class; and
o events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain
actions by or on behalf of the master servicer indicating its
insolvency, reorganization or inability to pay its
obligations.
If specified in the related prospectus supplement, the agreement will
permit the trustee to sell the assets of the trust fund in the event that
payments are insufficient to make the payments required under the agreement. The
assets of the trust fund will be sold only under the circumstances and in the
manner specified in the related prospectus supplement.
So long as an event of default under the related agreement remains
unremedied, the depositor or the trustee may, and, at the direction of holders
of securities of any class evidencing not less than 51% of the aggregate
percentage interests constituting that class and under such other circumstances
as may be specified in the agreement, the trustee shall, terminate all of the
rights and obligations of the master servicer relating to the trust fund and in
and to the related loans. Thereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the master servicer under the
agreement, including, if specified in the related prospectus supplement, the
obligation to make advances, and the trustee will be entitled to similar
compensation arrangements. In the event that the trustee is unwilling or unable
to act in this way, it may appoint, or petition a court of competent
jurisdiction to appoint, a loan servicing institution with a net worth of at
least $10,000,000 to act as successor to the master servicer under the
agreement. Pending the appointment, the trustee is obligated to act in this
capacity. The trustee and any successor master servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the master servicer under the agreement.
No securityholder, solely by virtue of its status as a securityholder,
will have any right under any agreement to institute any proceeding with respect
to that agreement, unless
o the holder has previously given to the trustee written notice
of default;
o the holders of securities of any class evidencing not less
than 25% of the aggregate percentage interests constituting
that class have made written request upon the trustee to
institute the proceeding in its own name as trustee and have
offered a reasonable indemnity to the trustee; and
o the trustee for 60 days has neglected or refused to institute
any such proceeding.
INDENTURE. Unless otherwise specified in the related prospectus
supplement, the following will be deemed "events of default" under the indenture
for each series of notes:
o failure to pay for five days or more any principal or interest
on any note of that series;
o failure by the depositor or the trust to perform any other
covenant in the indenture, which failure continues unremedied
for 30 days after notice is given in accordance with the
procedures described in the related prospectus supplement;
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o the material breach of any representation or warranty made by
the depositor or the trust in the indenture or in any document
delivered under the indenture, which breach continues uncured
for 30 days after notice is given in accordance with the
procedures described in the related prospectus supplement;
o events of bankruptcy insolvency, receivership or liquidation
of the depositor in the trust; or
o any other event of default specified in the indenture.
If an event of default with respect to the notes of a series (other
than principal only notes) occurs and is continuing, either the trustee or the
holders of a majority of the then aggregate outstanding amount of the notes of
that series may declare the principal amount of all the notes of that series to
be due and payable immediately. In the case of principal only notes, the portion
of the principal amount necessary to make such a declaration will be specified
in the related prospective supplement. This declaration may, under certain
circumstances, be rescinded and annulled by the holders of more than 50% of the
percentage ownership interest of the notes of that series.
If, following an event of default with respect to any series of notes,
the notes of that series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration of
acceleration so long as the collateral continues to provide sufficient funds for
the payment of principal and interest on the notes as they would have become due
if there had not been a declaration. In addition, the trustee may not sell or
otherwise liquidate the collateral securing the notes of a series following an
event of default, unless one of the following conditions precedent has occurred:
o the holders of 100% of the percentage ownership interest in
the related notes consent to the sale or liquidation;
o the proceeds of the sale or liquidation are sufficient to pay
the full amount of principal and accrued interest, due and
unpaid, on the related notes at the date of the sale or
liquidation; or
o the trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the
related notes as they would have become due if the notes had
not been declared due and payable, and the trustee obtains the
consent of the holders of 66% of the percentage ownership
interest of each class of the related notes.
Unless otherwise specified in the related prospectus supplement, in the
event the principal of the notes of a series is declared due and payable as
described above, the holders of any of those notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount of those notes less the amount of the unamortized discount.
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Subject to the provisions of the indenture relating to the duties of
the trustee, in case an event of default shall occur and be continuing with
respect to a series of notes, the trustee shall be under no obligation to
exercise any of the rights or powers under the indenture at the request or
direction of any of the holder of the related notes, unless the holders offer to
the trustee satisfactory security or indemnity against the trustee's costs,
expenses and liabilities which might be incurred in complying with their request
or direction. Subject to the indemnification provisions and certain limitations
contained in the indenture, the holders of a majority of the then aggregate
outstanding amount of the related notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee with respect to the related notes, and holders of a majority of the then
aggregate outstanding amount of the related notes may, in certain cases, waive
any default other than a default in the payment of principal or interest or a
default in respect of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the holders of the affected notes.
AMENDMENT
Unless otherwise specified in the related prospectus supplement, each
operative agreement may be amended by the depositor, the master servicer and the
trustee, without the consent of any of the securityholders, for the following
purposes:
o to cure any ambiguity,
o to correct or supplement any provision in the agreement which
may be defective or inconsistent with any other provision, or
o to make any other revisions with respect to matters or
questions arising under the agreement which are not
inconsistent with its other provisions.
In no event, however, shall any amendment adversely affect in any material
respect the interests of any securityholder as evidenced by either (i) an
opinion of counsel or (ii) confirmation by the rating agencies that such
amendment will not result in the downgrading of the securities. No amendment
shall be deemed to adversely affect in any material respect the interests of any
securityholder who shall have consented thereto, and no opinion of counsel or
written notice from the rating agencies shall be required to address the effect
of any such amendment on any such consenting securityholder. In addition, an
agreement may be amended without the consent of any of the securityholders to
change the manner in which the security account is maintained, so long as the
amendment does not adversely affect the then current ratings of the securities
rated by each rating agency named in the prospectus supplement. In addition, if
a REMIC election is made with respect to a trust fund, the related agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the trust fund as a REMIC,
but the trustee shall have first received an opinion of counsel to the effect
that the action is necessary or helpful to maintain the REMIC qualification.
Unless otherwise specified in the related prospectus supplement, each
operative agreement may also be amended by the depositor, the master servicer
and the trustee with consent of holders of securities evidencing not less than
66% of the aggregate percentage
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ownership interests of each affected class for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the agreement or of modifying in any manner the rights of the holders of the
related securities. In no event, however, shall any amendment
o reduce in any manner the amount of, or delay the timing of,
payments received on loans which are required to be
distributed on any security without the consent of the holder
of that security, or
o reduce the percentage of the securities of any class the
holders of which are required to consent to any amendment
without the consent of the holders of all securities of that
class then outstanding.
If a REMIC election is made with respect to a trust fund, the trustee will not
be entitled to consent to an amendment to the agreement without having first
received an opinion of counsel to the effect that the amendment will not cause
the trust fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION; CALLS
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related prospectus supplement, the obligations created by the
pooling and servicing agreement and trust agreement for the related series of
securities will terminate upon the payment to the securityholders of all amounts
held in the security account or held by the master servicer, and required to be
paid to the securityholders under the agreement, following the later to occur of
the following:
o the final payment or other liquidation of the last of the
assets of the trust fund subject to the agreement or the
disposition of all property acquired upon foreclosure of any
assets remaining in the trust fund, and
o the purchase from the trust fund by the master servicer, or
such other party as may be specified in the related prospectus
supplement, of all of the remaining trust fund assets and all
property acquired in respect of those assets.
SEE "Material Federal Income Tax Consequences" in this prospectus.
Unless otherwise specified in the related prospectus supplement, any
purchase of trust fund assets and property acquired in respect of trust fund
assets will be made at the option of the related master servicer or, if
applicable, another designated party, at a price, and in accordance with the
procedures, specified in the related prospectus supplement. The exercise of this
right will effect early retirement of the securities of that series. However,
this right can be exercised only at the times and upon the conditions specified
in the related prospectus supplement. If a REMIC election has been made with
respect to the trust fund, any repurchase pursuant to the second bullet point in
the immediately preceding paragraph will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(a)(4) of
the Internal Revenue Code.
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INDENTURE. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the trustee for cancellation of all the notes of
that series or, with certain limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of that series.
If specified for the notes of any series, the indenture will provide
that the related trust fund will be discharged from any and all obligations in
respect of the notes of that series (except for certain obligations relating to
temporary notes and exchange of notes, registering the transfer or exchange
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the trustee, in
trust, of money and/or direct obligations of or obligations guaranteed by the
United States which, through the payment of interest and principal in accordance
with their terms, will provide money in an amount sufficient to pay the
principal and each installment of interest on the related notes on the last
scheduled distribution date for the notes and any installment of interest on the
notes in accordance with the terms of the indenture and the notes of that
series. In the event of any such defeasance and discharge of a series of notes,
holders of the related notes would be able to look only to such money and/or
direct obligations for payment of principal and interest, if any, on their notes
until maturity.
CALLS. One or more classes of securities may be subject to a mandatory
or optional call at the times and subject to the conditions specified in the
related prospectus supplement. In the case of a mandatory call or in the event
an optional call is exercised with respect to one or more classes of securities,
holders of each affected class of securities will receive the outstanding
principal balance of their securities together with accrued and unpaid interest
at the applicable pass-through rate, subject to the terms specified in the
related prospectus supplement.
THE TRUSTEE
The trustee under each agreement will be named in the related
prospectus supplement. The commercial bank or trust company serving as trustee
may have normal banking relationships with the depositor, the master servicer
and any of their respective affiliates.
MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion contains general summaries of material legal
matters relating to the loans. Because the legal matters are determined
primarily by applicable state law and because state laws may differ
substantially, the summaries do not purport to be complete, to reflect the laws
of any particular state or to encompass the laws of all states in which security
for the loans may be situated. The summaries are qualified in their entirety by
reference to the applicable laws of the states in which loans may be originated.
GENERAL
SINGLE FAMILY LOANS, MULTIFAMILY LOANS AND HOME EQUITY LOANS. The loans
may be secured by deeds of trust, mortgages, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the property
subject to the loan is located. A mortgage creates a lien upon the real property
encumbered by the mortgage. The mortgage lien generally
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is not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage: the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties: the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys to the grantee title to, as opposed to merely creating a lien
upon, the subject property until such time as the underlying debt is repaid. The
trustee's authority under a deed of trust, the mortgagee's authority under a
mortgage and the grantee's authority under a security deed or deed to secure
debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
COOPERATIVE LOANS. Certain of the loans may be cooperative loans. The
cooperative owns all the real property that comprises the related project,
including the land, separate dwelling units and all common areas. The
cooperative is directly responsible for project management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If, as is
generally the case, there is a blanket mortgage on the cooperative and/or
underlying land, the cooperative, as project mortgagor, is also responsible for
meeting these mortgage obligations. A blanket mortgage is ordinarily incurred by
the cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under proprietary
leases or occupancy agreements to which the cooperative is a party are generally
subordinate to the interest of the holder of the blanket mortgage in that
building. If the cooperative is unable to meet the payment obligations arising
under its blanket mortgage, the mortgagee holding the blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements. In addition, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of a trust fund
including cooperative loans, the collateral securing the cooperative loans.
A cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and the accompanying rights are financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy
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agreement or proprietary lease and in the related cooperative shares. The lender
takes possession of the share certificate and a counterpart of the proprietary
lease or occupancy agreement and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or against the tenant-stockholder as an individual as
provided in the security agreement covering the assignment of the proprietary
lease or occupancy agreement and the pledge of cooperative shares.
MANUFACTURED HOUSING CONTRACTS. Each Manufactured Housing Contract
evidences both
o the obligation of the borrower to repay the loan it
represents, and
o the grant of a security interest in a manufactured home to
secure repayment of the loan.
The Manufactured Housing Contracts generally are "chattel paper" as
defined in the Uniform Commercial Code in effect in the states in which the
manufactured homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Under the related pooling
and servicing agreement, the depositor will transfer physical possession of the
Manufactured Housing Contracts to the trustee or its custodian. In addition the
depositor will file UCC-1 financing statements in the appropriate states to give
notice of the trustee's ownership of the Manufactured Housing Contracts. Under
the laws of most states, manufactured housing constitutes personal property and
is subject to the motor vehicle registration laws of the state or other
jurisdiction in which the unit is located. In a few states, where certificates
of title are not required for manufactured homes, security interests are
perfected by the filing of a financing statement under Article 9 of the UCC
which has been adopted by all states. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title generally issued by the
motor vehicles department of the state. In states which have enacted certificate
of title laws, a security interest in a unit of manufactured housing, so long as
it is not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of the interest on the certificate of title
to the unit in the appropriate motor vehicle registration office or by delivery
of the required documents and payment of a fee to that office, depending on
state law.
Unless otherwise specified in the related prospectus supplement, the
master servicer will be required to effect such notation or delivery of the
required documents and fees and to obtain possession of the certificate of
title, as appropriate under the laws of the state in which any manufactured home
is registered. If the master servicer fails to effect such notation or delivery,
due to clerical errors or otherwise, or files the security interest under the
wrong law (for example, under a motor vehicle title statute rather than under
the UCC, in a few states), the trustee may not have a first priority security
interest in the manufactured home securing the affected Manufactured Housing
Contract. As manufactured homes have become larger and have often been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real
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estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the manufactured home is located. These filings must be
made in the real estate records office of the county where the manufactured home
is located. Generally, Manufactured Housing Contracts will contain provisions
prohibiting the borrower from permanently attaching the manufactured home to its
site. So long as the borrower does not violate this agreement, a security
interest in the manufactured home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site, other parties could
obtain an interest in the manufactured home which is prior to the security
interest originally retained by the seller and transferred to the depositor.
The depositor will assign to the trustee, on behalf of the
securityholders, a security interest in the manufactured homes. Unless otherwise
specified in the related prospectus supplement, none of the depositor, the
master servicer or the trustee will amend the certificates of title to identify
the trustee, on behalf of the securityholders, as the new secured party and,
accordingly, the depositor or the seller will continue to be named as the
secured party on the certificates of title relating to the manufactured homes.
In most states, the assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the depositor's rights as the secured
party. However, in some states there exists a risk that, in the absence of an
amendment to the certificate of title, assignment of the security interest might
not be held effective against creditors of the depositor or seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the home owner, or administrative error by
state recording officials, the notation of the lien of the trustee on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
the manufactured home or subsequent lenders who take a security interest in the
manufactured home. In the case of any manufactured home as to which the security
interest assigned to the depositor and the trustee is not perfected, the
security interest would be subordinate to, among others, subsequent purchasers
for value of the manufactured home and holders of perfected security interests
in the home. There also exists a risk that, in not identifying the trustee, on
behalf of the securityholders, as the new secured party on the certificate of
title, the security interest of the trustee could be released through fraud or
negligence.
If the owner of a manufactured home moves it to a state other than the
state in which it initially is registered, the perfected security interest in
the manufactured home under the laws of most states would continue for four
months after relocation and thereafter until the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and re-register the manufactured home in the new state,
and if steps are not taken to re-perfect the trustee's security interest in the
new state, the security interest in the manufactured home would cease to be
perfected. A majority of states generally require
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surrender of a certificate of title to re-register a manufactured home.
Accordingly, the trustee must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states which provide for notation of lien, the master servicer
would receive notice of surrender if the security interest in the manufactured
home is noted on the certificate of title. Accordingly, the trustee would have
the opportunity to re-perfect its security interest in the manufactured home in
the new state. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when a borrower under a Manufactured Housing Contract sells a
manufactured home, the lender must surrender possession of the certificate of
title or it will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
Manufactured Housing Contract before the lien is released. The master servicer
will be obligated, at its own expense, to take all steps necessary to maintain
perfection of security interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest. The
depositor will obtain the representation of the seller that it has no knowledge
of any repair liens with respect to any manufactured home securing a
Manufactured Housing Contract. However, repair liens could arise at any time
during the term of a Manufactured Housing Contract. No notice will be given to
the trustee or securityholders in the event a repair lien arises.
FORECLOSURE
SINGLE FAMILY LOANS, MULTIFAMILY LOANS AND HOME EQUITY LOANS.
Foreclosure of a deed of trust is generally accomplished by a non-judicial sale
under a specific provision in the deed of trust which authorizes the trustee to
sell the mortgaged property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In some states, such as
California, the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. Before such non-judicial sale takes place, typically a notice of
sale must be posted in a public place and published during a specific period of
time in one or more newspapers, posted on the property and sent to parties
having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the mortgaged property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered
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by a lender. After the reinstatement period has expired without the default
having been cured, the borrower or junior lienholder no longer has the right to
reinstate the loan and must pay the loan in full to prevent the scheduled
foreclosure sale. If the deed of trust is not reinstated, a notice of sale must
be posted in a public place and, in most states, published for a specific period
of time in one or more newspapers. In addition, some state laws require that a
copy of the notice of sale be posted on the property and sent to all parties
having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
When the beneficiary under a junior mortgage or deed of trust cures the
default on the related senior mortgage or reinstates or redeems the senior
mortgage by paying it in full, the amount paid by the beneficiary to cure,
reinstate or redeem the senior mortgage becomes part of the indebtedness secured
by the junior mortgage or deed of trust. SEE "--Junior Mortgages, Rights of
Senior Mortgages" below.
COOPERATIVE LOANS. Cooperative shares owned by a tenant-stockholder and
pledged to a lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's articles of incorporation and
by-laws, as well as in the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative if the tenant-stockholder fails to pay rent or
other obligations or charges owed, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the cooperative enter into a recognition agreement which establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides, that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The
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total amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the value of the
collateral below the outstanding principal balance of the cooperative loan and
accrued and unpaid interest.
Recognition agreements also provide that, in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, lenders are
not limited in any rights they may have to dispossess tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account for the surplus to subordinate lenders or the
tenant-stockholder as provided in the UCC. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. SEE "--Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the cooperative when the building was so converted.
REPOSSESSION OF MANUFACTURED HOMES
Repossession of manufactured housing is governed by state law. A number
of states have enacted legislation that requires that the debtor be given an
opportunity to cure a monetary default (typically 30 days to bring the account
current) before repossession can commence. So long as a manufactured home has
not become attached to real estate in such way that it may be treated as a part
of the real estate under applicable state law, repossession in the event of a
default by the obligor will generally be governed by the UCC. Article 9 of the
UCC provides the statutory framework for the repossession of manufactured
housing. While the UCC as adopted by the various states may vary in certain
particulars, the general repossession procedure is discussed below.
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Because manufactured homes generally depreciate in value, it is
unlikely that repossession and resale of a manufactured home will result in the
full recovery of the outstanding principal and unpaid interest on the related
defaulted Manufactured Housing Contract.
Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon default
without prior notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or through
judicial process (repossession pursuant to court-issued writ of replevin). The
self-help and/or voluntary repossession methods, which are more commonly
employed, are accomplished simply by retaking possession of the manufactured
home. In cases in which the debtor objects or raises a defense to repossession,
a court order must be obtained from the appropriate state court, and the
manufactured home must then be repossessed in accordance with that order.
Whether the method employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an actual physical
removal of the manufactured home to a secure location for refurbishment and
resale or by removing the occupants and their belongings from the manufactured
home and maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the manufactured
home is physically removed or left on location, such as the nature and term of
the lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be by
public or private sale provided the method, manner, time, place and other terms
of the sale are commercially reasonable.
Sale proceeds are to be applied first to reasonable repossession
expenses (expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the indebtedness.
While some states impose prohibitions or limitations on deficiency judgments if
the net proceeds from resale do not cover the full amount of the indebtedness,
the remainder may be sought from the debtor in the form of a deficiency judgment
in those states that do not prohibit or limit such judgments. The deficiency
judgment is a personal judgment against the debtor for the shortfall.
Occasionally, after resale of a manufactured home and payment of all expenses
and indebtedness, there is a surplus of funds. In that case, the UCC requires
the party suing for the deficiency judgment to remit the surplus to the
subordinate creditors or the debtor, as provided in the UCC. Because the
defaulting owner of a manufactured home generally has very little capital or
income available following repossession, a deficiency judgment may not be sought
in many cases or, if obtained, will be settled at a significant discount in
light of the defaulting owner's strained financial condition.
Any contract secured by a manufactured home located in Louisiana will
be governed by Louisiana Revised Statutes in addition to Article 9 of the UCC.
Louisiana law provides similar mechanisms for perfection and enforcement of a
security interest in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
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Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished only after the
obligor's abandonment or with the obligor's consent given after or in
contemplation of default, or pursuant to judicial process and seizure by the
sheriff.
RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS, MULTIFAMILY LOANS AND HOME EQUITY LOANS. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the mortgaged property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan plus accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
MANUFACTURED HOUSING CONTRACTS. While state laws do not usually require
notice to be given debtors prior to repossession, many states do require
delivery of a notice of default and of the debtor's right to cure defaults
before repossession. The law in most states also requires that the debtor be
given notice of sale prior to the resale of a manufactured home so that the
owner may redeem at or before resale. In addition, the sale generally must
comply with the requirements of the UCC.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the
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borrower's failure to maintain the property adequately or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Certain states,
including California, have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the master servicer will not seek deficiency
judgments against defaulting borrowers. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a manufactured home. However, some
states impose prohibitions or limitations on deficiency judgments in these
cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code, the
federal Servicemembers Civil Relief Act and state laws affording relief to
debtors, may interfere with or affect the ability of the secured mortgage lender
to realize upon its security. For example, in a proceeding under the Bankruptcy
Code, a lender may not foreclose on the mortgaged property without the
permission of the bankruptcy court. If the mortgaged property is not the
debtor's principal residence and the bankruptcy court determines that the value
of the mortgaged property is less than the principal balance of the mortgage
loan, the rehabilitation plan proposed by the debtor may
o reduce the secured indebtedness to the value of the mortgaged
property as of the date of the commencement of the bankruptcy
thereby rendering the lender a general unsecured creditor for
the difference,
o reduce the monthly payments due under the mortgage loan,
o change the rate of interest of the mortgage loan, and
o alter the mortgage loan repayment schedule.
The effect of proceedings under the Bankruptcy Code, including but not limited
to any automatic stay, could result in delays in receiving payments on the
mortgage loans underlying a series of certificates and possible reductions in
the aggregate amount of payments.
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The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include the federal Truth-in-Lending Act, or TILA,
as implemented by Regulation Z, Real Estate Settlement Procedures Act, as
implemented by Regulation Z, Real Estate Settlement Procedures Act, as
implemented by Regulation X, Equal Credit Opportunity Act, as implemented by
Regulation B, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
In particular, an originator's failure to comply with certain requirements of
the federal TILA, as implemented by Regulation Z, could subject both originators
and assignees of such obligations to monetary penalties and could result in
borrowers' rescinding the mortgage loans either against the originators or
assignees.
HOMEOWNERSHIP ACT AND SIMILAR STATE LAWS
Some of the mortgage loans, known as High Cost Loans, may be subject to
the Home Ownership and Equity Protection Act of 1994, or Homeownership Act,
which amended TILA to provide new requirements applicable to loans not made to
finance the purchase of a mortgaged property that exceed certain interest rate
and/or points and fees thresholds. The Homeownership Act requires certain
additional disclosures, specifies when those disclosures are to be made and
limits or prohibits inclusion of certain features in High Cost Loans. Purchasers
or assignees of any High Cost Loan, including any trust, could be liable under
federal law for all claims and be subject to all defenses that the borrower
could assert against the originator of the High Cost Loan under TILA or any
other law, unless the purchaser or assignee did not know, and could not with
reasonable diligence have determined, that the loan was subject to the
Homeownership Act. Remedies available to the borrower include monetary penalties
as well as rescission rights, if the appropriate disclosures were not given as
required or if the particular loan includes features prohibited by the
Homeownership Act. The maximum damages that may be recovered from an assignee,
including the related trust, is the remaining amount of indebtedness plus the
total amount paid by the borrower in connection with the mortgage loan.
In addition to the Homeownership Act, a number of legislative proposals
have been introduced at both the federal and state levels that are designed to
discourage predatory lending practices. Some states have enacted, and other
state or local governments may enact, laws that impose requirements and
restrictions greater than those in the Homeownership Act. These laws prohibit
inclusion of certain features in mortgage loans that have interest rates or
origination costs in excess of prescribed levels, and require that borrowers be
given certain disclosures prior to the consummation of the mortgage loans.
Purchasers or assignees of a mortgage loan, including the related trust, could
be exposed to all claims and defenses that the borrower could assert against the
originator of the mortgage loan for a violation of state law. Claims and
defenses available to the borrower could include actual, statutory and punitive
damages, costs and attorneys' fees, rescission rights, defenses to foreclosure
action or an action to collect, and other equitable remedies.
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Unless otherwise specified in the accompanying prospectus supplement,
the depositor will represent and warrant that all of the mortgage loans in the
related pool complied in all material respects with all applicable local, state
and federal laws at the time of origination. Although the depositor will be
obligated to repurchase any mortgage loan as to which a breach of its
representation and warranty has occurred (so long as the breach is materially
adverse to the interests of the securityholders), the repurchase price of those
mortgage loans could be less than the monetary damages and/or any equitable
remedies imposed pursuant to various state laws.
Lawsuits have been brought in various states making claims against
assignees of High Cost Loans for violations of federal and state law allegedly
committed by the originator. Named defendants in these cases include numerous
participants within the secondary mortgage market, including some securitization
trusts.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission
has the effect of subjecting a seller and certain related creditors and their
assignees in a consumer credit transaction, and any assignee of the creditor, to
all claims and defenses which the debtor in the transaction could assert against
the seller of the goods. Liability under this FTC Rule is limited to the amounts
paid by a debtor on a Manufactured Housing Contract, and the holder of the
Manufactured Housing Contract may also be unable to collect amounts still due
under the Manufactured Housing Contract.
Most of the Manufactured Housing Contracts in a pool will be subject to
the requirements of this FTC Rule. Accordingly, the trustee, as holder of the
Manufactured Housing Contracts, will be subject to any claims or defenses that
the purchaser of the related manufactured home may assert against the seller of
the manufactured home, or that the purchaser of the home improvements may assert
against the contractor, subject to a maximum liability equal to the amounts paid
by the obligor on the Manufactured Housing Contract. If an obligor is successful
in asserting any such claim or defense, and if the seller had or should have had
knowledge of such claim or defense, the master servicer will have the right to
require the seller to repurchase the Manufactured Housing Contract because of a
breach of its representation and warranty that no claims or defenses exist which
would affect the borrower's obligation to make the required payments under the
Manufactured Housing Contract.
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials including such manufactured housing components as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and others
in the distribution process. Plaintiffs have won judgments in some of these
lawsuits.
Under the FTC Rule discussed above, the holder of a Manufactured
Housing Contract secured by a manufactured home with respect to which a
formaldehyde claim has been asserted successfully may be liable to the borrower
for the amount paid by the borrower on that Manufactured Housing Contract and
may be unable to collect amounts still due under that Manufactured Housing
Contract. Because the successful assertion of this type of claim would
constitute the breach of a representation or warranty of the seller, the related
securityholders would suffer a loss only to the extent that
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o the seller fails to perform its obligation to repurchase that
Manufactured Housing Contract, and
o the seller, the applicable depositor or the trustee is
unsuccessful in asserting a claim of contribution or
subrogation on behalf of the securityholders against the
manufacturer or other who are directly liable to the plaintiff
for damages.
Typical product liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities from the
presence of formaldehyde in manufactured housing. As a result, recoveries from
manufacturers and component suppliers may be limited to their corporate assets
without the benefit of insurance.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related prospectus supplement, each
conventional loan will contain a due-on-sale clause which will generally provide
that, if the mortgagor or obligor sells, transfers or conveys the mortgaged
property, the loan may be accelerated by the mortgagee or secured party. Unless
otherwise provided in the related prospectus supplement, the master servicer
will, to the extent it has knowledge of the sale, transfer or conveyance,
exercise its rights to accelerate the maturity of the related loans through
enforcement of the due-on-sale clauses, subject to applicable state law. SECTION
341(B) of the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St.
Germain) permits a lender, subject to certain conditions, to "enter into or
enforce a contract containing a due-on-sale clause with respect to a real
property loan," notwithstanding any contrary state law. Garn-St. Germain gave
states that previously had enacted "due-on-sale" restrictions a three-year
window to reenact the previous restrictions or enact new restrictions. Only six
states acted within this window period: Arizona, Florida, Michigan, Minnesota,
New Mexico and Utah. Consequently, due-on-sale provisions in documents governed
by the laws of those state are NOT preempted by federal law. With respect to
loans secured by an owner-occupied residence including a manufactured home, the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by the act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the
mortgaged property to an uncreditworthy person, which could increase the
likelihood of default, or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the loans and the number of loans which may extend to
maturity.
In addition, under the federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and under certain circumstances may
be eliminated in a resulting loan modification.
PREPAYMENT CHARGES; LATE FEES
Under certain state laws, prepayment charges with respect to
prepayments on loans secured by liens encumbering owner-occupied residential
properties may not be imposed after a certain period of time following the
origination of a loan. Since many of the mortgaged properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
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with respect to many of the loans. The absence of this type of a restraint on
prepayment, particularly with respect to fixed rate loans having higher loan
rates or APRs, may increase the likelihood of refinancing or other early
retirement of the loans. Legal restrictions, if any, on prepayment of
Multifamily Loans will be described in the related prospectus supplement.
Loans may also contain provisions obligating the borrower to pay a late
fee if payments are not timely made. In some states there may be specific
limitations on the late charges that a lender may collect from the borrower for
delinquent payments. Unless otherwise specified in the related prospectus
supplement, late fees will be retained by the applicable servicer as additional
servicing compensation.
Some state laws restrict the imposition of prepayment charges and late
fees even when the loans expressly provide for the collection of those charges.
Although the Alternative Mortgage Transaction Parity Act 1982, or the Parity
Act, permits the collection of prepayment charges and late fees in connection
with some types of eligible loans preempting any contrary state law
prohibitions, some states may not recognize the preemptive authority of the
Parity Act or have formally opted out of the Parity Act. As a result, it is
possible that prepayment charges may not be collected even on loans that provide
for the payment of those charges unless otherwise specified in the accompanying
prospectus supplement. The master servicer or any entity identified in the
accompanying prospectus supplement will be entitled to all prepayment charges
and late payment charges received on the loans and these amounts will not be
available for payment on the securities. The Office of Thrift Supervision or
OTS, the agency that administers the Parity Act for unregulated housing
creditors, has withdrawn its favorable Parity Act regulations and chief counsel
opinions that authorized lenders to charge prepayment charges and late fees in
certain circumstances notwithstanding contrary state law, effective July 1,
2003. However, the OTS's ruling does not have retroactive effect on loans
originated before July 1, 2003.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. The Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose limitations on interest rates and finance
charges by adopting before April 1, 1983 a law or constitutional provision which
expressly rejects application of the federal law. Fifteen states adopted such a
law prior to the April 1, 1983 deadline. In addition, even where Title V was not
rejected, any state is authorized to adopt a provision limiting discount points
or other charges on loans covered by Title V. No Manufactured Housing Contract
secured by a manufactured home located in any state in which application of
Title V was expressly rejected or a provision limiting discount points or other
charges has been adopted will be included in any trust fund if the Manufactured
Housing Contract imposes finance charges or provides for discount points or
charges in excess of permitted levels.
Title V also provides that state usury limitations will not apply to
any loan which is secured by a first lien on certain kinds of manufactured
housing provided that certain conditions
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are satisfied. These conditions relate to the terms of any prepayment, balloon
payment, late charges and deferral fees and the requirement of a 30-day notice
period prior to instituting any action leading to repossession of or foreclosure
with respect to the related unit.
SERVICEMEMBERS CIVIL RELIEF ACT
Generally, under the terms of the Servicemembers Civil Relief Act,
referred to herein as the Relief Act, borrowers who enter military service after
the origination of their mortgage loan may not be charged interest above an
annual rate of 6% during the period of active duty status. In addition to
adjusting the interest, the lender must forgive any such interest in excess of
6% per annum, unless a court or administrative agency of the United States or of
any state orders otherwise upon application of the lender. The Relief Act
applies to borrowers who are members of the Air Force, Army, Marines, Navy or
Coast Guard, and officers of the U.S. Public Health Service or the National
Oceanic and Atmospheric Administration assigned to duty with the military. The
Relief Act also applies to borrowers who are members of the National Guard or
are on reserve status at the time their mortgage is originated and are later
called to active duty. It is possible that the interest rate limitation could
have an effect, for an indeterminate period of time, on the ability of the
master servicer to collect full amounts of interest on affected mortgage loans.
Unless otherwise provided in the related prospectus supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the related securityholders. In addition, the Relief Act
imposes limitations which would impair the ability of the master servicer to
foreclose on an affected mortgage loan during the borrower's period of active
duty status. Thus, in the event that a mortgage loan goes into default, the
application of the Relief Act could cause delays and losses occasioned by the
lender's inability to realize upon the mortgaged property in a timely fashion.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states such a lien has priority over the lien
of an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), the United States Environmental Protection Agency (EPA) may impose a
lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, there is a possibility
that a lender may be held liable as an "owner" or "operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA imposes liability for
such costs on any and all "responsible parties," including owners or operators
of the property who did not cause or contribute to the contamination.
Furthermore, liability under CERCLA is not limited to the original or
outstanding balance of a loan or to the value of the related mortgaged property.
Lenders may be held liable under CERCLA as owners or operators unless they
qualify for the secured creditor exemption to CERCLA. This exemption exempts
from the definition of "owner" or "operator" those who, without participating in
the management of a
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facility, hold indicia of ownership primarily to protect a security interest in
the facility. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or property, the lender may incur
liability as an "owner" or "operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment, including leasing
the facility or property to a third party, or fails to market the property in a
timely fashion.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, or Conservation Act, amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities which a lender can engage in without losing the benefit of the
secured creditor exemption. For a lender to be deemed to have participated in
the management of a mortgaged property, the lender must actually participate in
the management or operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or the
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it (1) exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling or disposal practices
for the mortgaged property, or (2) assumes responsibility for the overall
management of the mortgaged property, including day-to-day decision-making for
environmental compliance, or (3) assumes management of substantially all
operational functions of the mortgaged property. The Conservation Act also
provides that a lender will continue to have the benefit of the secured creditor
exemption even in the event that it forecloses on a mortgaged property,
purchases it at a foreclosure sale or accepts a deed-in-lieu of foreclosure so
long as the lender seeks to sell the mortgaged property at the earliest
practicable commercially reasonable time on commercially reasonable terms.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act, which regulates underground petroleum storage tanks other than
heating oil tanks. The EPA has adopted a lender liability rule for underground
storage tanks under Subtitle I of the Resource Conservation Act. Under this
rule, a holder of a security interest in an underground storage tank or real
property containing an underground storage tank is not considered an operator of
the underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Conservation Act, the protections
accorded to lenders under CERCLA are also accorded to holders of security
interests in underground petroleum storage tanks. It should be noted, however,
that liability for cleanup of petroleum contamination may be governed by state
law, which may not provide for any specific protection for secured creditors.
The Conservation Act specifically addresses the potential liability
under CERCLA of lenders that hold mortgages or similar conventional security
interests in real property, as the trust fund generally does in connection with
the loans. However, the Conservation Act does not clearly address the potential
liability of lenders who retain legal title to a property and enter into an
agreement with the purchaser for the payment of the purchase price and interest
over the term of the contract as is the case with the installment contracts.
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If a lender (including a lender under an installment contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, these persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing contamination at a
property pledged as collateral for one of the loans (or at a property subject to
an installment contract), would be imposed on the trust fund, and thus occasion
a loss to the securityholders, depends on the specific factual and legal
circumstances at issue.
Except as otherwise specified in the applicable prospectus supplement,
at the time the mortgage loans were originated, no environmental assessment or a
very limited environment assessment of the mortgage properties was conducted.
Traditionally, many residential mortgage lenders have not taken steps
to determine whether contaminants are present on a mortgaged property prior to
the origination of a single family mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Except as otherwise specified in the
applicable prospectus supplement, neither the depositor nor any master servicer
will be required by any agreement to undertake any of these evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The depositor does not
make any representations or warranties or assume any liability with respect to
the absence or effect of contaminants on any mortgaged property or any casualty
resulting from the presence or effect of contaminants. However, the master
servicer will not be obligated to foreclose on any mortgaged property or accept
a deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on the property. A failure so to foreclose may
reduce the amounts otherwise available to securityholders of the related series.
The pooling and servicing agreement will provide that the master
servicer, acting on behalf of the trust fund, may not acquire title to a
multifamily residential property or mixed-use property underlying a loan or take
over its operation unless the master servicer has previously determined, based
upon a report prepared by a person who regularly conducts environmental audits,
that the mortgaged property is in compliance with applicable environmental laws
and regulations or that the acquisition would not be more detrimental than
beneficial to the value of the mortgaged property and the interests of the
related securityholders.
THE HOME IMPROVEMENT CONTRACTS
GENERAL. The Home Improvement Contracts, other than those that are
unsecured or secured by mortgages on real estate, generally are "chattel paper"
or constitute "purchase money security interests" each as defined in the UCC.
Under the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related agreement,
the depositor will transfer physical possession of these contracts to the
trustee or a designated custodian or may retain possession of them as custodian
for the trustee. In addition, the depositor will file a UCC-1 financing
statement in the appropriate states to give notice of the trustee's ownership of
the contracts. Unless otherwise specified in the related prospectus supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment
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from the depositor to the trustee. Therefore, if through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of such assignment, the trustee's interest in the
contracts could be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS. The Home Improvement Contracts
that are secured by the related home improvements grant to the originator a
purchase money security interest in the home improvements to secure all or part
of the purchase price of the home improvements and related services. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods and the purchase money security interests
are assignable. In general, a purchase money security interest grants to the
holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of the collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in the home improvement must generally be perfected by a timely fixture filing.
In general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the home improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS. So long as the
home improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
INSTALLMENT CONTRACTS
Under an installment contract the seller retains legal title to the
property and enters into an agreement with the purchaser/borrower for the
payment of the purchase price, plus interest,
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over the term of the contract. Only after full performance by the borrower of
the contract is the lender obligated to convey title to the property to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the installment contract, the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the installment contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an installment contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and
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all awards made in connection with condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage, in such order
as the mortgagee may determine. Thus, in the event improvements on the property
are damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to affect
the property or the rights of the mortgagee under the mortgage. Upon a failure
of the mortgagor to perform any of these obligations, the mortgagee is given the
right under certain mortgages to perform the obligation itself, at its election,
with the mortgagor agreeing to reimburse the mortgagee for any sums expended by
the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
cut-off date with respect to any mortgage will not be included in the trust
fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
THE TITLE I PROGRAM
GENERAL. Certain of the loans contained in a trust fund may be loans
insured under the FHA Title I Insurance program created pursuant to Sections 1
and 2(a) of the National Housing Act of 1934. Under the Title I Program, the FHA
is authorized and empowered to insure
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qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
Title I loan means a loan made to finance actions or items that
substantially protect or improve the basic livability or utility of a one- to
four-family residential property.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated and
agreed to by the borrower and the lender and must be fixed for the term of the
loan and recited in the note. Interest on an insured loan must accrue from the
date of the loan and be calculated according to the actuarial method. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD unless the lender determines and documents in
the loan file the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending
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institution (as is typically the case with other federal loan programs). If,
after a loan has been made and reported for insurance under the Title I Program,
the lender discovers any material misstatement of fact or that the loan proceeds
have been misused by the borrower, dealer or any other party, it shall promptly
report this to the FHA. In such case, provided that the validity of any lien on
the property has not been impaired, the insurance of the loan under the Title I
Program will not be affected unless such material misstatements of fact or
misuse of loan proceeds was caused by (or was knowingly sanctioned by) the
lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amount for Title
I loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I loans with respect to multiple properties, and a borrower may
obtain more than one Title I loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I loans in the same
property does not exceed the maximum loan amount for the type of Title I loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I loan or a recorded land installment contract for the purchase of
the real property. In the case of a Title I loan with a total principal balance
in excess of $15,000, if the property is not occupied by the owner, the borrower
must have equity in the property being improved at least equal to the principal
amount of the loan, as demonstrated by a current appraisal. Any Title I loan in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower and
all other owners in fee simple.
The proceeds from a Title I loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I loan where the
principal obligation is $7,500 or more, and on any direct Title I loan where the
borrower fails to submit a completion certificate.
FHA INSURANCE COVERAGE. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the lender
in originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is
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required to pay to the Title I lender. Loans to be insured under the Title I
Program will be registered for insurance by the FHA and the insurance coverage
attributable to such loans will be included in the insurance coverage reserve
account for the originating or purchasing lender following the receipt and
acknowledgment by the FHA of a loan report on the prescribed form pursuant to
the Title I regulations. For each eligible loan reported and acknowledged for
insurance, the FHA charges a premium. For loans having a maturity of 25 months
or less, the FHA bills the lender for the entire premium in an amount equal to
the product of 0.50% of the original loan amount and the loan term. For home
improvement loans with a maturity greater than 25 months, each year that a loan
is outstanding the FHA bills the lender for a premium in an amount equal to
0.50% of the original loan amount. If a loan is prepaid during the year, the FHA
will not refund or abate the premium paid for that year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of new
eligible loans will continue to increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer insurance
coverage between insurance coverage reserve accounts with earmarking with
respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guaranty or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD. Amounts which may be recovered by the Secretary of HUD after
payment of an insurance claim are not added to the amount of insurance coverage
in the related lender's insurance coverage reserve account.
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the
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default is cured or the borrower enters into a modification agreement or
repayment plan, the loan will be accelerated and that, if the default persists,
the lender will report the default to an appropriate credit agency. The lender
may rescind the acceleration of maturity after full payment is due and reinstate
the loan only if the borrower brings the loan current, executes a modification
agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the property under a security instrument (or
if it accepts a voluntary conveyance or surrender of the property), the lender
may file an insurance claim only with the prior approval of the Secretary of
HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I loan must be filed
with the FHA no later than 9 months after the date of default of the loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lien of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. Although the FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time up
to two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender,
the FHA has expressed an intention to limit the period of time within which it
will take such action to one year from the date the claim was certified for
payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the claimable amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "claimable
amount" means an amount equal to 90% of the sum of:
o the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with
adjustments thereto if the lender has proceeded against
property securing the loan;
s o the interest on the unpaid amount of the loan obligation from
the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to
exceed 9 months from the date of default), calculated at the
rate of 7% per year;
o the uncollected court costs;
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o the attorney's fees not to exceed $500; and
o the expenses for recording the assignment of the security to
the United States.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that enforcement
of the regulations would impose an injustice upon a lender which has
substantially complied with the regulations in good faith.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material federal income tax consequences
of the purchase, ownership and disposition of certificates is based on the
opinion of tax counsel to the depositor, either Sidley Austin Brown & Wood LLP
or Thacher Proffitt & Wood LLP, as specified in the related prospectus
supplement. This summary is based on the provisions of the Internal Revenue Code
of 1986, as amended, and the regulations, including the REMIC Regulations,
rulings and decisions promulgated thereunder and, where applicable, proposed
regulations, all of which are subject to change either prospectively or
retroactively. This summary does not address the material federal income tax
consequences of an investment in securities applicable to certain financial
institutions, banks, insurance companies, tax exempt organizations, dealers in
options, currency or securities, traders in securities that elect to mark to
market, or persons who hold positions other than securities such that the
securities are treated as part of a hedging transaction, straddle, conversion or
other integrated transaction which are subject to special rules. Because of the
complexity of the tax issues involved, we strongly suggest that prospective
investors consult their tax advisors regarding the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
securities.
GENERAL
The federal income tax consequences to securityholders will vary
depending on whether an election is made to treat the trust fund relating to a
particular series of securities as a REMIC under the Code. The prospectus
supplement for each series of securities will specify whether a REMIC election
will be made. In the discussion that follows, all references to a "section" or
"sections" shall be understood to refer, unless otherwise specifically
indicated, to a section or sections of the Code.
If a REMIC election is not made, in the opinion of tax counsel the
trust fund will not be classified as a publicly traded partnership, a taxable
mortgage pool, or an association taxable as a corporation. A trust fund that
qualifies as a "grantor trust" for federal income tax purposes also will receive
an opinion of tax counsel to the effect that:
o the trust fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code; and
o owners of certificates will be treated for federal income tax
purposes as owners of a portion of the trust fund's assets as
described below.
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A trust fund that issues notes may also receive an opinion of tax
counsel regarding the characterization of the notes as debt instruments for
federal income tax purposes.
With respect to each trust fund that elects REMIC status, in the
opinion of tax counsel, assuming compliance with all provisions of the related
agreement, the trust fund will qualify as a REMIC and the related certificates
will be considered to be regular interests or residual interests in the REMIC.
The related prospectus supplement for each series of securities will indicate
whether the trust fund will make a REMIC election and whether a class of
securities will be treated as a regular or residual interest in the REMIC.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service or any third party.
If, contrary to the opinion of tax counsel, the IRS successfully were
to assert that a class of notes did not represent debt instruments for federal
income tax purposes, that class of notes would be treated as equity interests in
the related trust fund. The trust fund would then be treated as a partnership
and could be a publicly traded partnership. If the trust fund were classified as
a publicly traded partnership, it would not be subject to taxation as a
corporation because its income would constitute "qualifying income" not derived
in the conduct of a financial business. Nevertheless, if the trust fund were
classified as a partnership, treatment of a class of notes as equity interests
in such a partnership could have adverse tax consequences to certain holders.
For example, income to foreign holders of such a class generally would be
subject to U.S. tax and withholding requirements, and individual holders of such
a class would be allocated their proportionate share of the trust's income but
might be subject to certain limitations on their ability to deduct their share
of the trust's expenses.
TAXATION OF DEBT SECURITIES
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided
in the related prospectus supplement, if the securities are regular interests in
a REMIC or represent interests in a grantor trust, in the opinion of tax
counsel:
o securities held by a domestic building and loan association
will constitute "loans... secured by an interest in real
property" within the meaning of section 7701(a)(19)(C)(v) of
the Code; and
o securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of section
856(c)(4)(A) of the Code and interest on securities will be
considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the
meaning of section 856(c)(3)(B) of the Code.
INTEREST AND ACQUISITION DISCOUNT. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the securities that are REMIC regular interests will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the holder's normal accounting method. Interest (other than
original issue discount) on securities (other than securities that are REMIC
regular interests) which are
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characterized as indebtedness for federal income tax purposes will be includible
in income by their holders in accordance with their usual methods of accounting.
When we refer to "debt securities" in this section, we mean securities
characterized as debt for federal income tax purposes and securities that are
REMIC regular interests. In the opinion of tax counsel, "compound interest
securities" (I.E., debt securities that permit all interest to accrue for more
than one year before payments of interest are scheduled to begin) will, and
certain of the other debt securities issued at a discount may, be issued with
"original issue discount" or OID. The following discussion is based in part on
the OID Regulations. A holder should be aware, however, that the OID Regulations
do not adequately address certain issues relevant to prepayable securities, such
as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for that class will be treated as
the fair market value of that class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but generally will
not include distributions of interest if the distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
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foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
DE MINIMIS rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the DE
MINIMIS rule described below. In the case of a debt security with a long first
period that has NON-DE MINIMIS OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the debt security will
generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a debt security.
Under the DE MINIMIS rule, OID on a debt security will be considered to
be zero if the OID is less than 0.25% of the stated redemption price at maturity
of the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (I.E., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report DE MINIMIS OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, accrual method holders may elect to accrue
all DE MINIMIS OID as well as market discount under a constant interest method.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the
total noncontingent principal payments, and
o interest is based on a "qualified floating rate," an
"objective rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly
accelerates or defers interest payments on the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities.
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Additionally, the OID Regulations do not contain provisions specifically
interpreting section 1272(a)(6) of the Code. Until the Treasury issues guidance
to the contrary, the trustee intends to base its computation on section
1272(a)(6) and the OID Regulations as described in this prospectus. However,
because no regulatory guidance currently exists under section 1272(a)(6) of the
Code, there can be no assurance that such methodology represents the correct
manner of calculating OID.
The holder of a debt security issued with OID must include in gross
income, for all days during its taxable year on which it holds the debt
security, the sum of the "daily portions" of OID. The amount of OID includible
in income by a holder will be computed by allocating to each day during a
taxable year a pro rata portion of the original issue discount that accrued
during the relevant accrual period. In the case of a debt security that is not a
Regular Interest Security and the principal payments on which are not subject to
acceleration resulting from prepayments on the loans, the amount of OID
includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the debt security and the adjusted issue price of the
debt security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to the debt security in all
prior periods, other than qualified stated interest payments.
Certain classes of the debt securities may be "pay-through securities,"
which are debt instruments that are subject to acceleration due to prepayments
on other debt obligations securing those instruments. The amount of OID to be
included in the income of a pay-through security is computed by taking into
account the prepayment rate assumed in pricing the debt instrument. The amount
of OID that will accrue during an accrual period on a pay-through security is
the EXCESS, if any, of the
o sum of
- the present value of all payments remaining to be
made on the pay-through security as of the close of
the accrual period and
- the payments during the accrual period of amounts
included in the stated redemption price of the
pay-through security,
over
o the adjusted issue price of the pay-through security at the
beginning of the accrual period.
The present value of the remaining payments is to be determined on the
basis of three factors:
o the original yield to maturity of the pay-through security
(determined on the basis of compounding at the end of each
accrual period and properly adjusted for the length of the
accrual period),
o events that have occurred before the end of the accrual
period, and
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o the assumption that the remaining payments will be made in
accordance with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect to
the loans at a rate that exceeds the prepayment assumption, and to decrease (but
not below zero for any period) the portions of OID required to be included in
income by a holder of a pay-through security to take into account prepayments
with respect to the loans at a rate that is slower than the prepayment
assumption. Although OID will be reported to holders of pay-through securities
based on the prepayment assumption, no representation is made to holders that
loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of securities
that are regular REMIC interests (or other regular interests in a REMIC) in a
manner that it believes to be appropriate, to take account of realized losses on
the loans, although the OID Regulations do not provide for such adjustments. If
the IRS were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a class of securities that are regular REMIC interests
could increase.
Certain classes of securities that are regular REMIC interests may
represent more than one class of REMIC regular interests. Unless otherwise
provided in the related prospectus supplement, the applicable trustee intends,
based on the OID Regulations, to calculate OID on such securities as if, solely
for the purposes of computing OID, the separate regular interests were a single
debt instrument.
A subsequent holder of a debt security will also be required to include
OID in gross income, but the holder who purchases the debt security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a debt security's issue price) to offset such
OID by comparable economic accruals of portions of the excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
INTEREST WEIGHTED SECURITIES. An "interest weighted security" is a
security that is a REMIC regular interest or a "stripped" security (as discussed
under "--Tax Status as a Grantor Trust; General" below) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on loans underlying pass-through
securities. It is not clear how income should be accrued with respect to
interest
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weighted securities. The trustee intends to take the position that all of the
income derived from an interest weighted security should be treated as OID and
that the amount and rate of accrual of such OID should be calculated by treating
the interest weighted security as a compound interest security. However, in the
case of interest weighted securities that are entitled to some payments of
principal and are REMIC regular interests, the IRS could assert that income
derived from the interest weighted security should be calculated as if the
security were a security purchased at a premium equal to the excess of the price
paid by the holder for the Security over its stated principal amount, if any.
Under this approach, a holder would be entitled to amortize such premium only if
it has in effect an election under section 171 of the Code with respect to all
taxable debt instruments held by such holder, as described below. Alternatively,
the IRS could assert that an interest weighted security should be taxable under
the rules governing bonds issued with contingent payments. This treatment may be
more likely in the case of interest weighted securities that are stripped
securities as described below. SEE "--Non-REMIC Certificates--B. Multiple
Classes of Senior Certificates--STRIPPED BONDS AND STRIPPED COUPONS" below.
VARIABLE RATE DEBT SECURITIES. In the opinion of tax counsel, in the
case of debt securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that the yield
to maturity of the debt securities and in the case of pay-through securities,
the present value of all payments remaining to be made on the debt securities,
should be calculated as if the interest index remained at its value as of the
issue date of the securities. Because the proper method of adjusting accruals of
OID on a variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
MARKET DISCOUNT. In the opinion of tax counsel, a purchaser of a
security may be subject to the market discount rules of sections 1276 through
1278 of the Code. A holder that acquires a debt security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the debt security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on the
debt security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (or in the case
of a pass-through security, as set forth below, the loans
underlying the security) not originally issued with OID,
stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period
or (b) in the case of securities (or, in the case of a
pass-through security, as described below, the loans
underlying the security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the debt security (or, in the case of a pass-through security, the
loans), the excess of interest paid or
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accrued to purchase or carry the security (or, in the case of a pass-through
security, as described below, the underlying loans) with market discount over
interest received on the security is allowed as a current deduction only to the
extent such excess is greater than the market discount that accrued during the
taxable year in which such interest expense was incurred. In general, the
deferred portion of any interest expense will be deductible when such market
discount is included in income, including upon the sale, disposition, or
repayment of the security (or in the case of a pass-through security, an
underlying loan). A holder may elect to include market discount in income
currently as it accrues, on all market discount obligations acquired by such
holder during the taxable year such election is made and thereafter, in which
case the interest deferral rule will not apply.
PREMIUM. In the opinion of tax counsel, a holder who purchases a debt
security (other than an interest weighted security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the security at a premium, which it may
elect to amortize as an offset to interest income on the security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that the
accrual of premium on a class of pay-through securities will be calculated using
the prepayment assumption used in pricing the class. If a holder makes an
election to amortize premium on a debt security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to section 1272(a)(6) of the
Code. Absent further guidance from the IRS, the trustee intends to account for
amortizable bond premium in the manner described above. Prospective purchasers
of the debt securities should consult their tax advisors regarding the possible
application of the amortizable bond premium regulations.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium
income as interest, based on a constant yield method for Debt securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a debt security with market discount, the holder of the debt security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the debt security acquires during the year of the election or
thereafter. Similarly, the holder of a debt security that makes this election
for a debt security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a debt security is irrevocable.
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SALE OR EXCHANGE OF A DEBT SECURITY. Sale or exchange of a debt
security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the seller's adjusted basis
in the debt security. Such adjusted basis generally will equal the seller's
purchase price for the debt security, increased by the OID and market discount
included in the seller's gross income with respect to the debt security, and
reduced by principal payments on the debt security previously received by the
seller and any premium amortized by the seller. Such gain or loss will be
capital gain or loss to a seller for which a debt security is a "capital asset"
within the meaning of section 1221 of the Code except to the extent of any
accrued but unrecognized market discount, and will be long-term or short-term
depending on whether the debt security has been owned for the long-term capital
gain holding period (currently more than one year).
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
It is possible that capital gain realized by holders of debt securities
could be considered gain realized upon the disposition of property that was part
of a "conversion transaction." A sale of a debt security will be part of a
conversion transaction if substantially all of the holder's expected return is
attributable to the time value of the holder's net investment, and at least one
of the following conditions is met:
o the holder entered the contract to sell the debt security
substantially contemporaneously with acquiring the debt
security;
o the debt security is part of a straddle;
o the debt security is marketed or sold as producing capital
gain; or
o other transactions to be specified in Treasury regulations
that have not yet been issued occur.
If the sale or other disposition of a debt security is part of a conversion
transaction, all or any portion of the gain realized upon the sale or other
disposition would be treated as ordinary income instead of capital gain.
NON-U.S. PERSONS. Generally, to the extent that a debt security
evidences ownership in mortgage loans that are issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under section
1441 or 1442 of the Code to (i) an owner that is not a U.S. Person or (ii) a
debt securityholder holding on behalf of an owner that is not a U.S. Person,
will be subject to federal income tax, collected by withholding, at a rate of
30% (or such lower rate as may be provided for interest by an applicable tax
treaty). Accrued OID recognized by the owner on the sale or exchange of such a
debt security also will be subject to federal income tax at the same rate.
Generally, such payments would not be subject to withholding to the extent that
a debt security evidences ownership in mortgage loans issued after July 18,
1984, if
114
o the debt securityholder does not actually or constructively
own 10% or more of the combined voting power of all classes of
equity in the issuer (which for purposes of this discussion
may be defined as the trust fund);
o the debt securityholder is not a controlled foreign
corporation within the meaning of section 957 of the Code
related to the issuer; and
o the debt securityholder complies with certain identification
requirements, including delivery of a statement, signed by the
debt securityholder under penalties of perjury, certifying
that it is not a U.S. Person and providing its name and
address.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each holder of a debt security at any time during the year,
such information as may be deemed necessary or desirable to assist
securityholders in preparing their federal income tax returns, or to enable
holders to make the information available to owners or other financial
intermediaries of holders that hold the debt securities as nominees. If a
holder, owner or other recipient of a payment on behalf of an owner fails to
supply a certified taxpayer identification number or if the Secretary of the
Treasury determines that such person has not reported all interest and dividend
income required to be shown on its federal income tax return, backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against the
recipient's federal income tax liability.
NON-REMIC CERTIFICATES
A. Single Class of Senior Certificates
CHARACTERIZATION. The trust fund may be created with one class of
senior certificates and one class of subordinated certificates. In this case,
each senior certificateholder will be treated as the owner of a pro rata
undivided interest in the interest and principal portions of the trust fund
represented by that senior certificate and will be considered the equitable
owner of a pro rata undivided interest in each of the mortgage loans in the
related mortgage pool. Any amounts received by a senior certificateholder in
lieu of amounts due with respect to any mortgage loan because of a default or
delinquency in payment will be treated for federal income tax purposes as having
the same character as the payments they replace.
Each holder of a senior certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
mortgage loans in the trust fund represented by that senior certificate,
including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the master servicer in accordance with the senior certificateholder's method
of accounting. Under section 162 or 212 of the Code, each senior
certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the master servicer, provided that these
amounts are reasonable compensation for services rendered to the trust fund. A
senior certificateholder that is an individual, estate or trust will be entitled
to deduct its share of expenses only to the extent such expenses, plus all other
section 212 expenses, exceed 2% of
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that senior certificateholder's adjusted gross income. A senior
certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
master servicer. A senior certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions as
they become due or are paid to the master servicer, whichever is earlier. If the
servicing fees paid to the master servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess could be considered as a
retained ownership interest by the master servicer, or any person to whom the
master servicer assigned for value all or a portion of the servicing fees, in a
portion of the interest payments on the mortgage loans. The mortgage loans might
then be subject to the "coupon stripping" rules of the Code discussed below.
Unless otherwise specified in the related prospectus supplement, tax
counsel will deliver its opinion to the depositor with respect to each series of
certificates that:
o a senior certificate owned by a "domestic building and loan
association" within the meaning of section 7701(a)(19) of the
Code representing principal and interest payments on mortgage
loans will be considered to represent "loans . . . secured by
an interest in real property which is . . . residential
property" within the meaning of section 7701(a)(19)(C)(v) of
the Code to the extent that the mortgage loans represented by
that senior certificate are of a type described in the
section;
o a senior certificate owned by a real estate investment trust
representing an interest in mortgage loans will be considered
to represent "real estate assets" within the meaning of
section 856(c)(4)(A) of the Code and interest income on the
mortgage loans will be considered "interest on obligations
secured by mortgages on real property" within the meaning of
section 856(c)(3)(B) of the Code to the extent that the
mortgage loans represented by that senior certificate are of a
type described in the section; and
o a senior certificate owned by a REMIC will be an "obligation .
. . which is principally secured by an interest in real
property" within the meaning of section 860G(a)(3)(A) of the
Code.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
section 593(d) of the Code to any taxable year beginning after December 31,
1995.
The assets constituting certain trust funds may include "buydown"
mortgage loans. The characterization of any investment in "buydown" mortgage
loans will depend upon the precise terms of the related buydown agreement, but
to the extent that such "buydown" mortgage loans are secured in part by a bank
account or other personal property, they may not be treated in their entirety as
assets described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in "buydown" mortgage loans. Accordingly,
holders of senior certificates should consult their own tax advisors with
respect to characterization of investments in senior certificates representing
an interest in a trust fund that includes "buydown" mortgage loans.
116
PREMIUM. The price paid for a senior certificate by a holder will be
allocated to the holder's undivided interest in each mortgage loan based on each
mortgage loan's relative fair market value, so that the holder's undivided
interest in each mortgage loan will have its own tax basis. A senior
certificateholder that acquires an interest in mortgage loans at a premium may
elect to amortize the premium under a constant interest method, provided that
the mortgage loan was originated after September 27, 1985. Premium allocable to
a mortgage loan originated on or before September 27, 1985 should be allocated
among the principal payments on the mortgage loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on a senior certificate. The basis for a
senior certificate will be reduced to the extent that amortizable premium is
applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under section 171 of the
Code. A certificateholder that makes this election for a certificate that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that the certificateholder acquires during the year of the election or
thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a senior certificate acquired at a premium
should recognize a loss, if a mortgage loan prepays in full, equal to the
difference between the portion of the prepaid principal amount of the mortgage
loan that is allocable to the senior certificate and the portion of the adjusted
basis of the senior certificate that is allocable to the mortgage loan. If a
reasonable prepayment assumption is used to amortize the premium, it appears
that a loss would be available, if at all, only if prepayments have occurred at
a rate faster than the reasonable assumed prepayment rate. It is not clear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
On December 30, 1997, the Internal Revenue Service issued final
amortizable bond premium regulations. These regulations, which generally are
effective for bonds issued or acquired on or after March 2, 1998 (or, for
holders making an election for the taxable year that included March 2, 1998 or
any subsequent taxable year, shall apply to bonds held on or after the first day
of the taxable year of the election). The amortizable bond premium regulations
specifically do not apply to prepayable debt instruments or any pool of debt
instruments, such as the trust fund, the yield on which may be affected by
prepayments which are subject to section 1272(a)(6) of the Code. Absent further
guidance from the IRS and unless otherwise specified in the related prospectus
supplement, the trustee will account for amortizable bond premium in the manner
described above. Prospective purchasers should consult their tax advisors
regarding amortizable bond premium and the amortizable bond premium regulations.
ORIGINAL ISSUE DISCOUNT. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code (currently sections 1271 through 1273 and section 1275) relating to
original issue discount (OID) will be applicable to a senior certificateholder's
interest in those mortgage loans meeting the conditions necessary for these
sections to apply. Accordingly, the following discussion is based in part on the
Treasury's OID Regulations issued on February 2, 1994 under sections 1271
through 1273 and section 1275 of the Code. Certificateholders should be aware,
however, that the OID Regulations do not
117
adequately address certain issues relevant to prepayable securities, such as the
certificates. Rules regarding periodic inclusion of OID income are applicable to
mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. OID could arise by
the financing of points or other charges by the originator of the mortgages in
an amount greater than a statutory DE MINIMIS exception to the extent that the
points are not currently deductible under applicable provisions of the Code or
are not for services provided by the lender. OID generally must be reported as
ordinary gross income as it accrues under a constant interest method. SEE "--B.
Multiple Classes of Senior Certificates--SENIOR CERTIFICATES REPRESENTING
INTERESTS IN LOANS OTHER THAN ARM LOANS--ACCRUAL OF ORIGINAL ISSUE DISCOUNT"
below.
MARKET DISCOUNT. A senior certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of
sections 1276 through 1278 to the extent an undivided interest in a mortgage
loan is considered to have been purchased at a "market discount". Generally, the
excess of the portion of the principal amount of a mortgage loan allocable to
the holder's undivided interest over the holder's tax basis in such interest.
Market discount with respect to a senior certificate will be considered to be
zero if the amount allocable to the senior certificate is less than 0.25% of the
senior certificate's stated redemption price at maturity multiplied by the
weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under sections 1276 through 1278 of the Code.
The Code provides that any principal payment, whether a scheduled
payment or a prepayment, or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants to the Department of the Treasury authority to
issue regulations providing for the computation of accrued market discount on
debt instruments, the principal of which is payable in more than one
installment. Although the Treasury has not yet issued regulations, rules
described in the relevant legislative history will apply. Under those rules, the
holder of a market discount bond may elect to accrue market discount either on
the basis of a constant interest rate or according to one of the following
methods. If a senior certificate is issued with OID, the amount of market
discount that accrues during any accrual period is equal to the product of
o the total remaining market discount
times
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o a fraction, the numerator of which is the original issue
discount accruing during the period and the denominator of
which is the total remaining original issue discount at the
beginning of the accrual period.
For senior certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
times
o a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be
paid at the beginning of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the senior certificates) which provide for
payments which may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of original issue discount will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a senior
certificate purchased at a discount or premium in the secondary market.
A holder who acquires a senior certificate at a market discount also
may be required to defer, until the maturity date of the senior certificate or
its earlier disposition in a taxable transaction, the deduction of a portion of
the amount of interest that the holder paid or accrued during the taxable year
on indebtedness incurred or maintained to purchase or carry the senior
certificate in excess of the aggregate amount of interest (including OID)
includible in such holder's gross income for the taxable year with respect to
the senior certificate. The amount of such net interest expense deferred in a
taxable year may not exceed the amount of market discount accrued on the senior
certificate for the days during the taxable year on which the holder held the
senior certificate and, in general, would be deductible when such market
discount is includible in income. The amount of any remaining deferred deduction
is to be taken into account in the taxable year in which the senior certificate
matures or is disposed of in a taxable transaction. In the case of a disposition
in which gain or loss is not recognized in whole or in part, any remaining
deferred deduction will be allowed to the extent of gain recognized on the
disposition. This deferral rule does not apply if the senior certificateholder
elects to include such market discount in income currently as it accrues on all
market discount obligations acquired by the senior certificateholder in that
taxable year or thereafter.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a certificateholder to elect to accrue all interest, discount
(including DE MINIMIS market or original issue discount) and premium in income
as interest, based on a constant yield method for certificates acquired on or
after April 4, 1994. If such an election is made with respect to a mortgage loan
with market discount, the certificateholder will be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such certificateholder
acquires during the year of the election or
119
thereafter. Similarly, a certificateholder that makes this election for a
certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such certificateholder owns or acquires. SEE
"--Regular Certificates--ORIGINAL ISSUE DISCOUNT AND PREMIUM" below. The
election to accrue interest, discount and premium on a constant yield method
with respect to a certificate is irrevocable.
ANTI-ABUSE RULE. The IRS is permitted to apply or depart from the rules
contained in the OID Regulations as necessary or appropriate to achieve a
reasonable result where a principal purpose in structuring a mortgage asset,
mortgage loan or senior certificate, or the effect of applying the otherwise
applicable rules, is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve the
clear reflection of income for both issuers and holders of debt instruments).
B. Multiple Classes of Senior Certificates
Stripped Bonds and Stripped Coupons
GENERAL. Pursuant to section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. For purposes
of sections 1271 through 1288 of the Code, section 1286 treats a stripped bond
or a stripped coupon as an obligation issued on the date that such stripped
interest is created. If a trust fund is created with two classes of senior
certificates, one class of senior certificates will represent the right to
principal and interest, or principal only, on all or a portion of the mortgage
loans ("stripped bond certificates"), while the second class of senior
certificates will represent the right to some or all of the interest on such
portion ("stripped coupon certificates").
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If such excess servicing fee is less than 100
basis points (I.E., 1% interest on the mortgage loan principal balance) or the
certificates are initially sold with a DE MINIMIS discount (assuming no
prepayment assumption is required), any non-DE MINIMIS discount arising from a
subsequent transfer of the certificates should be treated as market discount.
The IRS appears to require that reasonable servicing fees be calculated on a
mortgage loan by mortgage loan basis, which could result in some mortgage loans
being treated as having more than 100 basis points of interest stripped off.
Although not entirely clear, a stripped bond certificate generally
should be treated as a single debt instrument issued on the day it is purchased
for purposes of calculating any original issue discount. Generally, if the
discount on a stripped bond certificate is larger than a DE MINIMIS amount (as
calculated for purposes of the original issue discount rules), a purchaser of
such a certificate will be required to accrue the discount under the original
issue discount rules of the Code. SEE "--Single Class of Senior
Certificates--ORIGINAL ISSUE DISCOUNT" above. However, a purchaser of a stripped
bond certificate will be required to account for any discount on the certificate
as market discount rather than original issue discount if either
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o the amount of OID with respect to the certificate was treated
as zero under the OID DE MINIMIS rule when the certificate was
stripped, or
o no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) are stripped off
the trust fund's mortgage loans.
Pursuant to Revenue Procedure 91-49 issued on August 8, 1991, purchasers of
stripped bond certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of stripped coupon certificates is
substantially uncertain. The Code could be read literally to require that
original issue discount computations be made on a mortgage loan by mortgagee
loan basis. However, based on recent IRS guidance, it appears that a stripped
coupon certificate should be treated as a single installment obligation subject
to the original issue discount rules of the Code. As a result, all payments on a
stripped coupon certificate would be included in the certificate's stated
redemption price at maturity for purposes of calculating income on such
certificate under the original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
mortgage loans will give rise to a loss to the holder of a stripped bond
certificate purchased at a premium or a stripped coupon certificate. If a senior
certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to the senior certificate, it appears that no loss
may be available as a result of any particular prepayment unless prepayments
occur at a rate faster than the assumed prepayment rate. However, if the senior
certificate is treated as an interest in discrete mortgage loans or if no
prepayment assumption is used, then, when a mortgage loan is prepaid, the holder
of the certificate should be able to recognize a loss equal to the portion of
the adjusted issue price of the certificate that is allocable to the mortgage
loan.
Because of the complexity of these issues, we strongly suggest that
holders of stripped bond certificates and stripped coupon certificates consult
with their own tax advisors regarding the proper treatment of these certificates
for federal income tax purposes.
TREATMENT OF CERTAIN OWNERS. Several sections of the Code provide
beneficial treatment to certain taxpayers that invest in mortgage loans of the
type that make up the trust fund. With respect to these sections, no specific
legal authority exists regarding whether the character of the senior
certificates, for federal income tax purposes, will be the same as that of the
underlying mortgage loans. While section 1286 treats a stripped obligation as a
separate obligation for purposes of the provisions of the Code addressing
original issue discount, it is not clear whether such characterization would
apply with regard to these other sections. Although the issue is not free from
doubt, in the opinion of tax counsel, based on policy considerations, each class
of senior certificates should be considered to represent "real estate assets"
within the meaning of section 856(c)(4)(A) of the Code and "loans . . . secured
by, an interest in real property which is . . . residential real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code, and interest income
attributable to senior certificates should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of
section 856(c)(3)(B)
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of the Code, provided that in each case the underlying mortgage loans and
interest on such mortgage loans qualify for such treatment. Prospective
purchasers to which such characterization of an investment in senior
certificates is material should consult their own tax advisors regarding the
characterization of the senior certificates and related income. Senior
certificates will be "obligations (including any participation or certificate of
beneficial ownership therein) which are principally secured by an interest in
real property" within the meaning of section 860G(a)(3)(A) of the Code.
Senior Certificates Representing Interests in Loans Other Than ARM
Loans
GENERAL. The OID rules of sections 1271 through 1275 of the Code will
be applicable to a senior certificateholder's interest in those mortgage loans
as to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, OID could arise by the charging of points by the originator of the
mortgage in an amount greater than the statutory DE MINIMIS exception, including
a payment of points that is currently deductible by the borrower under
applicable provisions of the Code, or, under certain circumstances, by the
presence of "teaser" rates on the mortgage loans. OID on each senior certificate
must be included in the owner's ordinary income for federal income tax purposes
as it accrues, in accordance with a constant interest method that takes into
account the compounding of interest, in advance of receipt of the cash
attributable to such income. The amount of OID required to be included in an
owner's income in any taxable year with respect to a senior certificate
representing an interest in mortgage loans other than mortgage loans with
interest rates that adjust periodically (ARM loans) likely will be computed as
described under "--ACCRUAL OF ORIGINAL ISSUE DISCOUNT" below. The following
discussion is based in part on the OID Regulations and in part on the provisions
of the Tax Reform Act of 1986, as amended. The OID Regulations generally are
effective for debt instruments issued on or after April 4, 1994, but may be
relied upon as authority with respect to debt instruments such as the senior
certificates issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issue date of the mortgage loans should be used or, in the case of
stripped bond certificates or stripped coupon certificates, the date when these
certificates are acquired. The holder of a senior certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address certain issues relevant to prepayable securities.
Under the Code, the mortgage loans underlying each senior certificate
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such mortgage loan's stated redemption
price at maturity over its issue price. The issue price of a mortgage loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a mortgage loan is the sum of all payments to be made on such mortgage loan
other than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described under "--ACCRUAL OF ORIGINAL ISSUE DISCOUNT"
below, will, unless otherwise specified in the related
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prospectus supplement, utilize the original yield to maturity of the senior
certificate calculated based on a reasonable assumed prepayment rate for the
mortgage loans underlying the senior certificates and will take into account
events that occur during the calculation period. This prepayment assumption will
be determined in the manner prescribed by regulations that have not yet been
issued. The legislative history of the Tax Reform Act provides, however, that
the regulations will require that this prepayment assumption be the prepayment
assumption that is used in determining the offering price of the certificate. No
representation is made that any certificate will prepay at the prepayment
assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to prepayment, and, until further
guidance is issued, the master servicer intends to calculate and report OID
under the method described below.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. Generally, the owner of a senior
certificate must include in gross income the sum of the "daily portions", as
defined below, of the OID on that senior certificate for each day on which it
owns the senior certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of
original issue discount with respect to each component generally will be
determined as follows under the Amendments. A calculation will be made by the
master servicer or such other entity specified in the related prospectus
supplement of the portion of original issue discount that accrues during each
successive monthly accrual period (or shorter period from the date of original
issue) that ends on the day in the calendar year corresponding to each of the
distribution dates on the senior certificate (or the day prior to each such
date). This will be done, in the case of each full month accrual period, by
adding
o the present value at the end of the accrual period (determined
by using as a discount factor the original yield to maturity
of the respective component, under the Prepayment Assumption)
of all remaining payments to be received under the Prepayment
Assumption on the respective component, and
o any payments received during such accrual period (other than a
payment of qualified stated interest), and subtracting from
that total the "adjusted issue price" of the respective
component at the beginning of such accrual period.
The "adjusted issue price" of a senior certificate at the beginning of the first
accrual period is its issue price; the "adjusted issue price" of a senior
certificate at the beginning of a subsequent accrual period is the "adjusted
issue price" at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period reduced by the amount of any
payment (other than a payment of qualified stated interest) made at the end of
or during that accrual period. The OID during the accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
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OID generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued OID, less prior
payments of principal. Accordingly, if mortgage loans acquired by a
certificateholder are purchased at a price equal to the then unpaid principal
amount of such mortgage loan, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
mortgage loan (I.E., points) will be includible by such holder. Other OID on the
mortgage loans (E.G., that arising from a "teaser" rate) would still need to be
accrued.
Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such
as the senior certificates (if the related trust fund includes ARM loans), which
represent interests in ARM loans. Additionally, the IRS has not issued guidance
under the coupon stripping rules of the Code with respect to these instruments.
In the absence of any authority, the master servicer will report OID on senior
certificates attributable to ARM loans ("stripped ARM obligations") to holders
in a manner it believes to be consistent with the rules described under the
heading "--SENIOR CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER THAN ARM
LOANS" above and with the OID Regulations. In general, application of these
rules may require inclusion of income on a stripped ARM obligation in advance of
the receipt of cash attributable to such income. Further, the addition of
deferred interest resulting from negative amortization to the principal balance
of an ARM loan may require the inclusion of such amount in the income of the
senior certificateholder when the amount accrues. Furthermore, the addition of
deferred interest to the senior certificate's principal balance will result in
additional income (including possibly OID income) to the senior
certificateholder over the remaining life of the senior certificates.
Because the treatment of stripped ARM obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to these certificates.
C. Possible Application of Contingent Payment Regulations to Certain
Non-REMIC Certificates
Final regulations issued on June 11, 1996 with respect to OID under
section 1275 include "contingent payment regulations" covering obligations that
provide for one or more contingent payments. Rights to interest payments on a
mortgage loan might be considered to be contingent within the meaning of the
contingent payment regulations if the interest would not be paid if the borrower
exercised its right to prepay the mortgage loan. However, in the case of an
investor having a right to shares of the interest and principal payments on a
mortgage loan when the share of interest is not substantially greater than the
share of principal, the possibility of prepayment should not be considered to
characterize otherwise noncontingent interest payments as contingent payments.
The absence of interest payments following a prepayment would be the normal
consequence of the return of the investor's capital in the form of a principal
payment. On the other hand, a right to interest on such a mortgage loan is more
likely to be regarded as contingent if held by an investor that does not also
hold a right to the related principal. Such an
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investor would not recover its capital through receipt of a principal payment at
the time of the prepayment of the mortgage loan.
Applying these principles to the senior certificates, because the
mortgage loans are subject to prepayment at any time, payments on a class of
senior certificates representing a right to interest on the mortgage loans could
be considered to be contingent within the meaning of the contingent payment
regulations, at least if the senior certificate was issued at a premium. The
likelihood that such payments will be considered contingent increases the
greater the amount of such premium.
In the event that payments on a senior certificate in respect of
interest on the mortgage loans are considered contingent, then the holder would
generally report income or loss as described under the heading "--STRIPPED BONDS
AND STRIPPED COUPONS" above; PROVIDED, HOWEVER, that the yield that would be
used in calculating interest income would not be the actual yield but would
instead equal the "applicable Federal rate" (AFR), in effect at the time of
purchase of the senior certificate by the holder. The AFR generally is an
average of current yields on Treasury securities computed and published monthly
by the IRS. In addition, once the holder's adjusted basis in the senior
certificate has been reduced (by prior distributions or losses) to an amount
equal to the aggregate amount of the remaining noncontingent payments of the
mortgage loans that are allocable to the senior certificate (or to zero if the
senior certificate does not share in principal payments), then the holder would
recognize income in each subsequent month equal to the full amount of interest
on the mortgage loans that accrues in that month and is allocable to the senior
certificate. It is uncertain whether, under the contingent payment regulations,
any other adjustments would be made to take account of prepayments of the
mortgage loans.
D. Sale or Exchange of a Senior Certificate
Sale or exchange of a senior certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the seller's adjusted basis in the senior certificate. Such
adjusted basis generally will equal the seller's purchase price for the senior
certificate, increased by the OID and market discount included in the seller's
gross income with respect to the senior certificate, and reduced by principal
payments on the senior certificate previously received by the seller and any
premium amortized by the seller. Such gain or loss will be capital gain or loss
to a seller for which a senior certificate is a "capital asset" within the
meaning of section 1221 of the Code except to the extent of any accrued but
unrecognized market discount, and will be long-term or short-term depending on
whether the senior certificate has been owned for the long-term capital gain
holding period (currently more than one year).
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
It is possible that capital gain realized by holders of the senior
certificates could be considered gain realized upon the disposition of property
that was part of a "conversion transaction". A sale of a senior certificate will
be part of a conversion transaction if substantially
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all of the holder's expected return is attributable to the time value of the
holder's net investment, and at least one of the following conditions is met:
o the holder entered the contract to sell the senior certificate
substantially contemporaneously with acquiring the senior
certificate;
o the senior certificate is part of a straddle;
o the senior certificate is marketed or sold as producing
capital gain; or
o other transactions to be specified in Treasury regulations
that have not yet been issued occur.
If the sale or other disposition of a senior certificate is part of a conversion
transaction, all or any portion of the gain realized upon the sale or other
disposition would be treated as ordinary income instead of capital gain.
Senior certificates will be "evidences of indebtedness" within the
meaning of section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a senior certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
E. Non-U.S. Persons
Generally, to the extent that a senior certificate evidences ownership
in mortgage loans that are issued on or before July 18, 1984, interest or OID
paid by the person required to withhold tax under section 1441 or 1442 to (i) an
owner that is not a U.S. Person or (ii) a senior certificateholder holding on
behalf of an owner that is not a U.S. Person, will be subject to federal income
tax, collected by withholding, at a rate of 30% or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued OID recognized by the
owner on the sale or exchange of such a senior certificate also will be subject
to federal income tax at the same rate. Generally, such payments would not be
subject to withholding to the extent that a senior certificate evidences
ownership in mortgage loans issued after July 18, 1984, if
o the senior certificateholder does not actually or
constructively own 10% or more of the combined voting power of
all classes of equity in the issuer (which for purposes of
this discussion may be defined as the trust fund);
o the senior certificateholder is not a controlled foreign
corporation within the meaning of section 957 of the Code
related to the issuer; and
o the senior certificateholder complies with certain
identification requirements, including delivery of a
statement, signed by the senior certificateholder under
penalties of perjury, certifying that it is not a U.S. Person
and providing its name and address.
F. Information Reporting and Backup Withholding
The master servicer will furnish or make available, within a reasonable
time after the end
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of each calendar year, to each certificateholder at any time during the year,
such information as may be deemed necessary or desirable to assist
securityholders in preparing their federal income tax returns, or to enable
holders to make the information available to owners or other financial
intermediaries of holders that hold the certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, backup withholding may be
required with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against the recipient's
federal income tax liability.
G. New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations
which attempt to unify certification requirements and modify reliance standards
effective for payments made after December 31, 2000.
REMIC CERTIFICATES
H. General
The trust fund relating to a series of certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Although a REMIC is not generally subject to federal income
tax (SEE, however, "--Prohibited Transactions and Other Taxes") below, if a
trust fund with respect to which a REMIC election is made fails to comply with
one or more of the ongoing requirements of the Code for REMIC status during any
taxable year (including the implementation of restrictions on the purchase and
transfer of the residual interest in a REMIC as described under "--Residual
Certificates" below), the Code provides that a trust fund will not be treated as
a REMIC for such year and thereafter. In that event, such entity may be taxable
as a separate corporation, and the related REMIC certificates may not be
accorded the status or given the tax treatment described below. While the Code
authorizes the Treasury to issue regulations providing relief in the event of an
inadvertent termination of status as a REMIC, no such regulations have been
issued. Moreover, any relief may be accompanied by sanctions such as the
imposition of a corporate tax on all or a portion of the REMIC's income for the
period in which the requirements for such status are not satisfied. With respect
to each trust fund that elects REMIC status, in the opinion of tax counsel,
assuming compliance with all provisions of the related Agreement, the trust fund
will qualify as a REMIC and the related certificates will be considered to be
regular interests ("regular certificates") or residual interests ("residual
certificates") in the REMIC. The related prospectus supplement for each series
of certificates will indicate whether the trust fund will make a REMIC election
and whether a class of certificates will be treated as a regular or residual
interest in the REMIC.
In general, with respect to each series of certificates for which a
REMIC election is made,
o certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets
described in section 7701(a)(19)(C) of the Code;
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o certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of section
856(c)(4)(A) of the Code; and
o interest on certificates held by a real estate investment
trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of section
856(c)(3)(B) of the Code.
If less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing sections, the certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
mortgage loans held pending distribution on the REMIC certificates will be
considered to be qualifying assets under the foregoing sections.
In some instances, the mortgage loans may not be treated entirely as
assets described in the foregoing sections. SEE, in this regard, the discussion
of "buydown" mortgage loans contained in "--NON-REMIC CERTIFICATES--SINGLE CLASS
OF SENIOR CERTIFICATEs" above. REMIC certificates held by a real estate
investment trust will not constitute "Government Securities" within the meaning
of section 856(c)(4)(A) of the Code and REMIC certificates held by a regulated
investment company will not constitute "Government Securities" within the
meaning of section 851(b)(4)(A)(ii) of the Code. REMIC certificates held by
certain financial institutions will constitute "evidences of indebtedness"
within the meaning of section 582(c)(1) of the Code.
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
"single family residences" under section 25(e)(10) of the Code will qualify as
real property without regard to state law classifications. Under section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and which is of a kind customarily used at a fixed location.
I. Tiered REMIC Structures
For certain series of certificates, two separate elections may be made
to treat designated portions of the related trust fund as REMICs (respectively,
the "subsidiary REMIC" and the "master REMIC") for federal income tax purposes.
Upon the issuance of any such series of certificates, tax counsel will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the related pooling and servicing agreement, the master REMIC as
well as any subsidiary REMIC will each qualify as a REMIC and the REMIC
certificates issued by the master REMIC and the subsidiary REMIC, respectively,
will be considered to evidence ownership of regular certificates or residual
certificates in the related REMIC within the meaning of the REMIC provisions.
Only REMIC certificates issued by the master REMIC will be offered
under this prospectus. The subsidiary REMIC and the master REMIC will be treated
as one REMIC solely for purposes of determining
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o whether the REMIC certificates will be (i) "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code
or (ii) "loans secured by an interest in real property" under
section 7701(a)(19)(C) of the Code; and
o whether the income on the certificates is interest described
in section 856(c)(3)(B) of the Code.
J. Regular Certificates
GENERAL. Except as otherwise stated in this discussion, regular
certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of regular certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
regular certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. The regular certificates may be
issued with OID within the meaning of section 1273(a) of the Code. Generally,
the amount of OID, if any, will equal the difference between the "stated
redemption price at maturity" of a regular certificate and its "issue price".
Holders of any class of certificates issued with OID will be required to include
such OID in gross income for federal income tax purposes as it accrues, in
accordance with a constant interest method based on the compounding of interest,
in advance of receipt of the cash attributable to such income. The following
discussion is based in part on the OID Regulations and in part on the provisions
of the Tax Reform Act. Holders of regular certificates should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities such as the regular certificates.
Rules governing OID are set forth in sections 1271 through 1273 and
section 1275 of the Code. These rules require that the amount and rate of
accrual of OID be calculated based on a Prepayment Assumption and prescribe a
method for adjusting the amount and rate of accrual of such discount where the
actual prepayment rate differs from the Prepayment Assumption. Under the Code,
the Prepayment Assumption must be determined in the manner prescribed by
regulations which have not yet been issued. The Legislative History provides,
however, that Congress intended the regulations to require that the Prepayment
Assumption be the prepayment assumption that is used in determining the initial
offering price of the regular certificates. The prospectus supplement for each
series of regular certificates will specify the prepayment assumption to be used
for the purpose of determining the amount and rate of accrual of OID. No
representation is made that the regular certificates will prepay at the
prepayment assumption or at any other rate.
In general, each regular certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price". The issue price of
a regular certificate is the first price at which a substantial amount of
regular certificates of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). If less than a substantial amount
of a particular class of regular certificates is sold for cash on or prior to
the date of their initial issuance, the issue price for that class will be
treated as the fair market value of that class on the initial issue date. The
issue price of a regular certificate also includes the amount paid by an initial
regular certificateholder for
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accrued interest that relates to a period prior to the initial issue date of the
regular certificate. The stated redemption price at maturity of a regular
certificate includes the original principal amount of the regular certificate,
but generally will not include distributions of interest if such distributions
constitute "qualified stated interest". Qualified stated interest generally
means interest payable at a single fixed rate or qualified variable rate (as
described below) provided that the interest payments are unconditionally payable
at intervals of one year or less during the entire term of the regular
certificate. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on regular certificates with respect to which deferred
interest will accrue will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of the regular certificates
includes all distributions of interest as well as principal thereon.
Where the interval between the initial issue date and the first
distribution date on a regular certificate is longer than the interval between
subsequent distribution dates, the greater of any OID (disregarding the rate in
the first period) and any interest foregone during the first period is treated
as the amount by which the stated redemption price at maturity of the
certificate exceeds its issue price for purposes of the DE MINIMIS rule
described below. The OID Regulations suggest that all interest on a
long-first-period regular certificate that is issued with non-DE MINIMIS OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first distribution date on a regular certificate
is shorter than the interval between subsequent distribution dates, interest due
on the first Distribution Date in excess of the amount that accrued during the
first period would be added to the certificates stated redemption price at
maturity. Regular securityholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a regular
certificate.
Under the DE MINIMIS rule, OID on a regular certificate will be
considered to be zero if the amount of OID is less than 0.25% of the stated
redemption price at maturity of the regular certificate multiplied by the
weighted average maturity of the regular certificate. For this purpose, the
weighted average maturity of the regular certificate is computed as the sum of
the amounts determined by multiplying
o the number of full years (I.E., rounding down partial years)
from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made
times
o a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at
maturity of the regular certificate and the denominator of
which is the stated redemption price at maturity of the
regular certificate.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
mortgage loans and the anticipated reinvestment rate, if any, relating to the
regular certificates. This prepayment assumption with respect to a series of
regular certificates will be set forth in the related
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prospectus supplement. Holders generally must report DE MINIMIS OID pro rata as
principal payments are received and such income will be capital gain if the
regular certificate is held as a capital asset. However, accrual method holders
may elect to accrue all DE MINIMIS OID as well as market discount under a
constant interest method.
The prospectus supplement with respect to a trust fund may provide for
certain regular certificates to be issued as "super-premium" certificates at
prices significantly exceeding their principal amounts or based on notional
principal balances. The income tax treatment of these super-premium certificates
is not entirely certain. For information reporting purposes, the trust fund
intends to take the position that the stated redemption price at maturity of the
super-premium certificates is the sum of all payments to be made on these
certificates determined under the prepayment assumption set forth in the related
prospectus supplement, with the result that the super-premium certificates would
be treated as being issued with OID. The calculation of income in this manner
could result in negative OID (which delays future accruals of OID rather than
being immediately deductible) when prepayments on the mortgage loans exceed
those estimated under the prepayment assumption. The IRS might contend, however,
that the contingent payment regulations should apply to the super-premium
certificates.
Although the contingent payment regulations are not applicable to
instruments governed by section 1272(a)(6) of the Code, they represent the only
guidance regarding the current view of the IRS with respect to contingent
payment instruments. In the alternative, the IRS could assert that the stated
redemption price at maturity of such regular certificates should be limited to
their principal amount (subject to the discussion under "--ACCRUED INTEREST
CERTIFICATES" below), so that such regular certificates would be considered for
U.S. federal income tax purposes to be issued at a premium. If such position
were to prevail, the rules described under "--PREMIUM" below would apply. It is
unclear when a loss may be claimed for any unrecovered basis for a super-premium
certificate. It is possible that a holder of a super-premium certificate may
only claim a loss when its remaining basis exceeds the maximum amount of future
payments, assuming no further prepayments, or when the final payment is received
with respect to the super-premium certificate.
Under the REMIC Regulations, if the issue price of a regular
certificate (other than regular certificate based on a notional amount) does not
exceed 125% of its actual principal amount, the interest rate is not considered
disproportionately high. Accordingly, a regular certificate generally should not
be treated as a super-premium certificate and the rules described below under
"--PREMIUM" below should apply. However, it is possible that holders of regular
certificates issued at a premium, even if the premium is less than 25% of the
certificate's actual principal balance, will be required to amortize the premium
under an OID method or contingent interest method even though no election under
section 171 of the Code is made to amortize such premium.
Generally, a regular certificateholder must include in gross income the
"daily portions," as determined below, of the OID that accrues on a regular
certificate for each day the regular certificateholder holds the regular
certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a regular certificate, a calculation will be
made of the portion of the OID that accrues during each successive accrual
period that ends on the day in the calendar year corresponding to a distribution
date (or if distribution dates are on
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the first day or first business day of the immediately preceding month, interest
may be treated as payable on the last day of the immediately preceding month)
and begins on the day after the end of the immediately preceding accrual period
(or on the issue date in the case of the first accrual period). This will be
done, in the case of each full accrual period, by adding
o the present value at the end of the accrual period (determined
by using as a discount factor the original yield to maturity
of the regular certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the
regular certificate under the Prepayment Assumption, and
o any payments included in the stated redemption price at
maturity received during the accrual period,
and subtracting from that total the "adjusted issue price" of the regular
certificates at the beginning of the accrual period.
The "adjusted issue price" of a regular certificate at the beginning of
the first accrual period is its issue price; the "adjusted issue price" of a
regular certificate at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the accrual period. The OID accrued during an accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the accrual period. The calculation of OID under the method
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in a given accrual period to reflect the fact that
prepayments are occurring faster or slower than under the Prepayment Assumption.
With respect to an initial accrual period shorter than a full accrual period,
the daily portions of OID may be determined according to an appropriate
allocation under any reasonable method.
A subsequent purchaser of a regular certificate issued with OID who
purchases the regular certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that regular certificate. In computing
the daily portions of OID for such a purchaser (as well as an initial purchaser
that purchases at a price higher than the adjusted issue price but less than the
stated redemption price at maturity), however, the daily portion is reduced by
the amount that would be the daily portion for such day (computed in accordance
with the rules set forth above) multiplied by a fraction, the numerator of which
is the amount, if any, by which the price paid by such holder for that regular
certificate exceeds the following amount:
o the sum of the issue price plus the aggregate amount of OID
that would have been includible in the gross income of an
original regular certificateholder (who purchased the regular
certificate at its issue price),
less
o any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that regular
certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed
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under the Prepayment Assumption. A holder who pays an acquisition premium
instead may elect to accrue OID by treating the purchase as original issue.
VARIABLE RATE REGULAR CERTIFICATES. Regular certificates may provide
for interest based on a variable rate. Interest based on a variable rate will
constitute qualified stated interest and not contingent interest if, generally,
o the interest is unconditionally payable at least annually;
o the issue price of the debt instrument does not exceed the
total noncontingent principal payments; and
o interest is based on a "qualified floating rate", an
"objective rate", a combination of a single fixed rate and one
or more "qualified floating rates", one "qualified inverse
floating rate", or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates
or defers interest payments on the regular certificate.
The amount of OID with respect to a regular certificate bearing a
variable rate of interest will accrue in the manner described under "--ORIGINAL
ISSUE DISCOUNT AND PREMIUM" above by assuming generally that the index used for
the variable rate will remain fixed throughout the term of the certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the depositor intends to treat interest on
a regular certificate that is a weighted average of the net interest rates on
mortgage loans as qualified stated interest. In such case, the weighted average
rate used to compute the initial pass-through rate on the regular certificates
will be deemed to be the index in effect through the life of the regular
certificates. It is possible, however, that the IRS may treat some or all of the
interest on regular certificates with a weighted average rate as taxable under
the rules relating to obligations providing for contingent payments. Such
treatment may effect the timing of income accruals on regular certificates.
MARKET DISCOUNT. A purchaser of a regular certificate may be subject to
the market discount provisions of sections 1276 through 1278 of the Code. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of
o the regular certificate's stated principal amount or, in the
case of a regular certificate with OID, the adjusted issue
price (determined for this purpose as if the purchaser had
purchased the regular certificate from an original holder)
over
o the price for the regular certificate paid by the purchaser.
A holder who purchases a regular certificate at a market discount will recognize
income upon receipt of each distribution representing stated redemption price.
In particular, under section 1276 of the Code such a holder generally will be
required to allocate each principal distribution first to accrued market
discount not previously included in income and to recognize ordinary
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income to that extent. A certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by the certificateholder on or after the first
day of the first taxable year to which the election applies. In addition, the
OID Regulations permit a certificateholder using the accrual method of
accounting to elect to accrue all interest, discount (including DE MINIMIS
market or original issue discount) and premium in income as interest, based on a
constant yield method. If such an election is made with respect to a regular
certificate with market discount, the certificateholder will be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that the certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the
certificateholder owns or acquires. SEE "--ORIGINAL ISSUES DISCOUNT AND PREMIUM"
above. The election to accrue interest, discount and premium on a constant yield
method with respect to a certificate is irrevocable.
Market discount with respect to a regular certificate will be
considered to be zero if the amount allocable to the regular certificate is less
than 0.25% of the regular certificate's stated redemption price at maturity
multiplied by the regular certificate's weighted average maturity remaining
after the date of purchase. If market discount on a regular certificate is
considered to be zero under this rule, the actual amount of market discount must
be allocated to the remaining principal payments on the regular certificate and
gain equal to such allocated amount will be recognized when the corresponding
principal payment is made. Treasury regulations implementing the market discount
rules have not yet been issued; therefore, investors should consult their own
tax advisors regarding the application of these rules and the advisability of
making any of the elections allowed under sections 1276 through 1278 of the
Code.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Until such time
as regulations are issued by the Treasury, rules described in the legislative
history of the Tax Reform Act will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. For
regular certificates issued with OID, the amount of market discount that accrues
during a period is equal to the product of
o the total remaining market discount
multiplied by
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o a fraction, the numerator of which is the OID accruing during
the period and the denominator of which is the total remaining
OID at the beginning of the period.
For regular certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
multiplied by
o a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be
paid at the beginning of the period.
For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the regular certificates) which
provide for payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption applicable
to calculating the accrual of OID will apply.
A holder of a regular certificate that acquires it at a market discount
also may be required to defer, until the maturity date of the regular
certificate or its earlier disposition in a taxable transaction, the deduction
of a portion of the amount of interest that the holder paid or accrued during
the taxable year on indebtedness incurred or maintained to purchase or carry the
regular certificate in excess of the aggregate amount of interest (including
OID) includible in the holder's gross income for the taxable year with respect
to the regular certificate. The amount of such net interest expense deferred in
a taxable year may not exceed the amount of market discount accrued on the
regular certificate for the days during the taxable year on which the holder
held the regular certificate and, in general, would be deductible when such
market discount is includible in income. The amount of any remaining deferred
deduction is to be taken into account in the taxable year in which the regular
certificate matures or is disposed of in a taxable transaction. In the case of a
disposition in which gain or loss is not recognized in whole or in part, any
remaining deferred deduction will be allowed to the extent of gain recognized on
the disposition. This deferral rule does not apply if the regular
certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by the regular
certificateholder in that taxable year or thereafter.
PREMIUM. A purchaser of a regular certificate who purchases the regular
certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the regular certificate at a premium and may elect to amortize
such premium under a constant yield method. A certificateholder that makes this
election for a certificate that is acquired at a premium will be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such certificateholder acquires during the
year of the election or thereafter. It is not clear whether the prepayment
assumption would be taken into account in determining the life of the regular
certificate for this purpose. However, the legislative history of the Tax Reform
Act states that the same rules that apply to accrual of market discount (which
rules require use of a prepayment assumption in accruing market discount with
respect to regular certificates without
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regard to whether the certificates have OID) will also apply in amortizing bond
premium under section 171 of the Code. The Code provides that amortizable bond
premium will be allocated among the interest payments on the regular
certificates and will be applied as an offset against the interest payment.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations on the amortization of bond premium. The foregoing discussion is
based in part on such proposed regulations. On December 30, 1997, the IRS issued
the amortizable bond premium regulations which generally are effective for bonds
acquired on or after March 2, 1998 or, for holders making an election to
amortize bond premium as described above, the taxable year that includes March
2, 1998 or any subsequent taxable year, will apply to bonds held on or after the
first day of taxable year in which such election is made. Neither the proposed
regulations nor the final regulations, by their express terms, apply to
prepayable securities described in section 1272(a)(6) of the Code such as the
regular certificates. Holders of regular certificates should consult their tax
advisors regarding the possibility of making an election to amortize any such
bond premium.
DEFERRED INTEREST. Certain classes of regular certificates will provide
for the accrual of interest when one or more ARM Loans are adding deferred
interest to their principal balance by reason of negative amortization. Any
deferred interest that accrues with respect to a class of regular certificates
will constitute income to the holders of such certificates prior to the time
distributions of cash with respect to deferred interest are made. It is unclear,
under the OID Regulations, whether any of the interest on such certificates will
constitute qualified stated interest or whether all or a portion of the interest
payable on the certificates must be included in the stated redemption price at
maturity of the certificates and accounted for as OID (which could accelerate
such inclusion). Interest on regular certificates must in any event be accounted
for under an accrual method by the holders of these certificates. Applying the
latter analysis therefore may result only in a slight difference in the timing
of the inclusion in income of interest on the regular certificates.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Certain series of certificates
may contain one or more classes of subordinated certificates and, in the event
there are defaults or delinquencies on the mortgage loans, amounts that would
otherwise be distributed on the subordinated certificates may instead be
distributed on the senior certificates. Holders of subordinated certificates
nevertheless will be required to report income with respect to these
certificates under an accrual method without giving effect to delays and
reductions in distributions on such subordinated certificates attributable to
defaults and delinquencies on the mortgage loans, except to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a holder of a subordinated certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated certificate is reduced as a result of defaults
and delinquencies on the mortgage loans. However, the timing and character of
such losses or reductions in income are uncertain. Accordingly, holders of
subordinated certificates should consult their own tax advisors on this point.
SALE, EXCHANGE OR REDEMPTION. If a regular certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized
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on the sale, exchange, redemption, or retirement and the seller's adjusted basis
in the regular certificate. The adjusted basis generally will equal the cost of
the regular certificate to the seller, increased by any OID and market discount
included in the seller's gross income with respect to the regular certificate,
and reduced (but not below zero) by payments included in the stated redemption
price at maturity previously received by the seller and by any amortized
premium. Similarly, a holder who receives a payment which is part of the stated
redemption price at maturity of a regular certificate will recognize gain equal
to the excess, if any, of the amount of the payment over the holder's adjusted
basis in the regular certificate. The holder of a regular certificate that
receives a final payment which is less than the holder's adjusted basis in the
regular certificate will generally recognize a loss. Except as provided in the
following paragraph and as provided under "--MARKET DISCOUNT" above, any such
gain or loss will be capital gain or loss, provided that the regular certificate
is held as a "capital asset" (generally, property held for investment) within
the meaning of section 1221 of the Code.
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
Gain from the sale or other disposition of a regular certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the EXCESS, if any, of:
o the amount that would have been includible in such holder's
income with respect to the regular certificate had income
accrued thereon at a rate equal to 110% of the AFR as defined
in section 1274(d) of the Code determined as of the date of
purchase of such regular certificate,
over
o the amount actually includible in the holder's income.
Gain from the sale or other disposition of a regular certificate that
might otherwise be capital gain will be treated as ordinary income, (i) if the
regular certificate is held as part of a "conversion transaction" as defined in
section 1258(c) of the Code, up to the amount of interest that would have
accrued at the applicable federal rate under section 1274(d) of the Code in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, or (ii) if the regular
certificate is held as part of a straddle. Potential investors should consult
their tax advisors with respect to the tax consequences of ownership and
disposition of an investment in regular certificates in their particular
circumstances.
Regular certificates will be "evidences of indebtedness" within the
meaning of section 582(c)(1) of the Code so that gain or loss recognized from
the sale of a regular certificate by a bank or a thrift institution to which
such section applies will be ordinary income or loss.
The regular certificate information reports will include a statement of
the adjusted issue price of the regular certificate at the beginning of each
accrual period. In addition, the reports
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will include information necessary to compute the accrual of any market discount
that may arise upon secondary trading of regular certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC may
not have, it appears that the information reports will only require information
pertaining to the appropriate proportionate method of accruing market discount.
ACCRUED INTEREST CERTIFICATES. Regular certificates that are "payment
lag" certificates may provide for payments of interest based on a period that
corresponds to the interval between distribution dates but that ends prior to
each distribution date. The period between the initial issue date of the payment
lag certificates and their first distribution date may or may not exceed such
interval. Purchasers of payment lag certificates for which the period between
the initial issue date and the first distribution date does not exceed such
interval could pay upon purchase of the regular certificates accrued interest in
excess of the accrued interest that would be paid if the interest paid on the
distribution date were interest accrued from distribution date to distribution
date. If a portion of the initial purchase price of a regular certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest"), and the regular certificate provides for a payment of stated
interest on the first payment date (and the first payment date, is within one
year of the issue date) that equals or exceeds the amount of the pre-issuance
accrued interest, then the regular certificate's issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the regular certificate. However, it is
unclear under this method how the proposed OID Regulations treat interest on
payment lag certificates as described above. Therefore, in the case of a payment
lag certificate, the REMIC intends to include accrued interest in the issue
price and report interest payments made on the first distribution date as
interest only to the extent such payments represent interest for the number of
days that the certificateholder has held the payment lag certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of payment lag certificates.
NON-INTEREST EXPENSES OF THE REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC", a portion
of the REMIC's servicing, administrative and other noninterest expenses will be
allocated as a separate item to those regular securityholders that are
"pass-through interest holders". Generally, a single-class REMIC is defined as
(i) a REMIC that would be treated as a fixed investment trust under Treasury
regulations but for its qualification as a REMIC or (ii) a REMIC that is
substantially similar to an investment trust but is structured with the
principal purpose of avoiding this allocation requirement imposed by the
temporary regulations. Such a pass-through interest holder would be required to
add its allocable share, if any, of such expenses to its gross income and to
treat the same amount as an item of investment expense. An individual generally
would be allowed a deduction for such expenses only as a miscellaneous itemized
deduction subject to the limitations under section 67 of the Code. That section
allows such deductions only to the extent that in the aggregate such expenses
exceed 2% of the holder's adjusted gross income. In addition, section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a certain amount (the "applicable
amount") will be reduced by the lesser of (i) 3% of the excess of the
individual's
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adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. As a result of the
Economic Growth and Tax Relief Reconciliation Act of 2001 (the "2001 Act"),
limitations imposed by section 68 of the Code on claiming itemized deductions
will be phased-out commencing in 2006. Unless amended, this provision of the
2001 Act will no longer apply for taxable years beginning on or after December
31, 2010. The amount of additional taxable income recognized by residual
securityholders who are subject to the limitations of either section 67 or
section 68 may be substantial. The REMIC is required to report to each
pass-through interest holder and to the IRS such holder's allocable share, if
any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities including regulated investment companies, but does
not include real estate investment trusts. Certificateholders that are
"pass-through interest holders" should consult their own tax advisors about the
impact of these rules on an investment in the regular certificates.
TREATMENT OF REALIZED LOSSES. Although not entirely clear, it appears
that holders of regular certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any regular certificates becoming wholly or partially worthless
and that, in general, holders of certificates that are not corporations should
be allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any regular certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of certificates
may be allowed a bad debt deduction at such time that the principal balance of
any regular certificate is reduced to reflect realized losses resulting from any
liquidated mortgage loans. The IRS, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect realized
losses only after all mortgage loans remaining in the related trust fund have
been liquidated or the certificates of the related series have been otherwise
retired. Prospective investors in and holders of the certificates are urged to
consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such certificates, including any
loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
certificates.
NON-U.S. PERSONS. Generally, payments of interest (including any
payment with respect to accrued OID) on the regular certificates to a regular
certificateholder who is a non-U.S. Person not engaged in a trade or business
within the United States will not be subject to federal withholding tax if
o the regular certificateholder does not actually or
constructively own 10% or more of the combined voting power of
all classes of equity in the issuer (which for purposes of
this discussion may be defined as the trust fund or the
beneficial owners of the related residual certificates);
o the regular certificateholder is not a controlled foreign
corporation (within the meaning of section 957 of the Code)
related to the issuer; and
o the regular certificateholder complies with certain
identification requirements,
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including delivery of a statement, signed by the regular
certificateholder under penalties of perjury, certifying that
it is a foreign person and providing its name and address.
If a regular certificateholder is not exempt from withholding, distributions of
interest, including distributions in respect of accrued OID, the holder may be
subject to a 30% withholding tax, subject to reduction under any applicable tax
treaty.
Further, it appears that a regular certificate would not be included in
the estate of a nonresident alien individual and would not be subject to United
States estate taxes. However, securityholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
Regular securityholders who are non-U.S. Persons and persons related to
such holders should not acquire any residual certificates, and residual
securityholders and persons related to residual securityholders should not
acquire any regular certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each regular certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist regular
securityholders in preparing their federal income tax returns or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold regular certificates. If a holder, owner or
other recipient of a payment on behalf of an owner fails to supply a certified
taxpayer identification number or if the Secretary of the Treasury determines
that such person has not reported all interest and dividend income required to
be shown on its federal income tax return, backup withholding may be required
with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS. On October 6, 1997, the Treasury
Department issued the new regulations which attempt to unify certification
requirements and modify reliance standards effective for payments made after
December 31, 2000.
K. Residual Certificates
ALLOCATION OF THE INCOME OF THE REMIC TO THE RESIDUAL CERTIFICATES. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. SEE "--Prohibited
Transactions and Other Taxes" below. Instead, each original holder of a residual
certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which such holder owns any residual certificates. The taxable income of
the REMIC for each day will be determined by allocating the taxable income of
the REMIC for each calendar quarter ratably to each day in the quarter. The
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding residual certificates that the holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the residual securityholders without regard to the
timing or amounts of cash
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distributions by the REMIC. Ordinary income derived from residual certificates
will be "portfolio income" for purposes of the taxation of taxpayers subject to
the limitations on the deductibility of "passive losses". As residual interests,
the residual certificates will be subject to tax rules, described below, that
differ from those that would apply if the residual certificates were treated for
federal income tax purposes as direct ownership interests in the certificates or
as debt instruments issued by the REMIC.
A residual certificateholder may be required to include taxable income
from the residual certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(I.E., a fast-pay, slow-pay structure) may generate such a mismatching of income
and cash distributions (I.E., "phantom income"). This mismatching may be caused
by the use of certain required tax accounting methods by the REMIC, variations
in the prepayment rate of the underlying mortgage loans and certain other
factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
residual certificate to a residual certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a residual
certificate and the impact of such tax treatment on the after-tax yield of a
residual certificate.
A subsequent residual certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that the residual certificateholder owns the residual
certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original residual certificateholder,
as described above. The legislative history of the Tax Reform Act indicates that
certain adjustments may be appropriate to reduce (or increase) the income of a
subsequent holder of a residual certificate that purchased the residual
certificate at a price greater than (or less than) the adjusted basis the
residual certificate would have in the hands of an original residual
certificateholder. SEE "--SALE OR EXCHANGE OF RESIDUAL CERTIFICATES" below. It
is not clear, however, whether such adjustments will in fact be permitted or
required and, if so, how they would be made. The REMIC Regulations do not
provide for any such adjustments.
TAXABLE INCOME OF THE REMIC ATTRIBUTABLE TO RESIDUAL CERTIFICATES. The
taxable income of the REMIC will reflect a netting of the income from the
mortgage loans and the REMIC's other assets and the deductions allowed to the
REMIC for interest and OID on the regular certificates and, except as described
under "--NON-INTEREST EXPENSES OF THE REMIC" below, other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the regular and residual certificates (or, if a class of certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the mortgage loans and other assets of the REMIC in proportion
to their respective fair market values. A mortgage loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less or greater, respectively than its principal balance. Any such
discount (whether market discount or OID) will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing OID on
the regular certificates. The REMIC expects to elect under section 171 of the
Code to amortize any premium on the mortgage loans. Premium on any mortgage loan
to which the
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election applies would be amortized under a constant yield method. It is likely
that the yield of a mortgage loan would be calculated for this purpose taking
account of the prepayment assumption. However, the election would not apply to
any mortgage loan originated on or before September 27, 1985. Instead, premium
on such a mortgage loan would be allocated among the principal payments thereon
and would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the
regular certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to regular
certificates except that the 0.25% per annum DE MINIMIS rule and adjustments for
subsequent holders described therein will not apply.
A residual certificateholder will not be permitted to amortize the cost
of the residual certificate as an offset to its share of the REMIC's taxable
income. However, such taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the residual certificates will be added to the issue
price of the regular certificates in determining the REMIC's initial basis in
its assets. SEE "--SALE OR EXCHANGE OF RESIDUAL CERTIFICATES" below. For a
discussion of possible adjustments to income of a subsequent holder of a
residual certificate to reflect any difference between the actual cost of the
residual certificate to such holder and the adjusted basis the residual
certificate would have in the hands of an original residual certificateholder,
SEE "--ALLOCATION OF THE INCOME OF THE REMIC TO THE RESIDUAL CERTIFICATES"
above.
ADDITIONAL TAXABLE INCOME OF RESIDUAL INTERESTS. Any payment received
by a holder of a residual certificate in connection with the acquisition of the
residual certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt or
accrual as ordinary income, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
such payments, holders of residual certificates should consult their tax
advisors concerning the treatment of such payments for income tax purposes.
NET LOSSES OF THE REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. The net loss
would be allocated among the residual securityholders in the same manner as the
REMIC's taxable income. The net loss allocable to any residual certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in the residual certificate. Any net loss that is not
currently deductible by reason of this limitation may only be used by the
residual certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of residual securityholders that
are individuals or closely held corporations to deduct net losses may be subject
to additional limitations under the Code.
MARK-TO-MARKET REGULATIONS. Prospective purchasers of a residual
certificate should be aware that the IRS finalized mark-to-market regulations
which provide that a residual certificate acquired after January 3, 1995 cannot
be marked to market. The mark-to-market regulations
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replaced the temporary regulations which allowed a residual certificate to be
marked to market provided that it was not a "negative value" residual interest.
INDUCEMENT FEES. Regulations have been proposed addressing the federal
income tax treatment of "inducement fees" received by transferees of
non-economic REMIC residual interests. The proposed regulations would require
inducement fees to be included in income over a period reasonably related to the
period in which the related REMIC residual interest is expected to generate
taxable income or net loss to its holder. Under two proposed safe harbor
methods, inducement fees would be permitted to be included in income
(i) in the same amounts and over the same period that the taxpayer
uses for financial reporting purposes, provided that such
period is not shorter than the period the REMIC is expected to
generate taxable income or
(ii) ratably over the remaining anticipated weighted average life
of all the regular and residual interests issued by the REMIC,
determined based on actual distributions projected as
remaining to be made on such interests under the Prepayment
Assumption.
If the holder of a residual interest sells or otherwise disposes of the
residual interest, any unrecognized portion of the inducement fee would be
required to be taken into account at the time of the sale or disposition.
If these rules are adopted without change, they will apply to taxable
years ending on or after the date that they are published as final regulations,
and consequently these rules may govern the treatment of any inducement fee
received in connection with the purchase of non-economic REMIC residual
interests. Prospective purchasers of the non-economic REMIC residual interests
should consult with their tax advisors regarding the effect of these proposed
regulations
NON-INTEREST EXPENSES OF THE REMIC. The REMIC's taxable income will be
determined in the same manner as if the REMIC were an individual. However, all
or a portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to residual securityholders that
are "pass-through interest holders". Such a holder would be required to add an
amount equal to its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense.
Individuals are generally allowed a deduction for such an investment expense
only as a miscellaneous itemized deduction subject to the limitations under
section 67 of the Code which allows such deduction only to the extent that, in
the aggregate, all such expenses exceed 2% of an individual's adjusted gross
income. In addition, the personal exemptions and itemized deductions of
individuals with adjusted gross incomes above particular levels are subject to
certain limitations which reduce or eliminate the benefit of such items. The
REMIC is required to report to each pass-through interest holder and to the IRS
the holder's allocable share, if any, of the REMIC's non-interest expenses. The
term "pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not include
real estate investment trusts. Residual securityholders that are "pass-through
interest holders" should consult their own tax
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advisors about the impact of these rules on an investment in the residual
certificates. SEE "--Regular Certificates--NON-INTEREST EXPENSES OF THE REMIC"
above.
EXCESS INCLUSIONS. A portion of the income on a residual certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion
o may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a residual
certificateholder;
o will be treated as "unrelated business taxable income" within
the meaning of section 512 of the Code if the residual
certificateholder is a pension fund or any other organization
that is subject to tax only on its unrelated business taxable
income (SEE "Tax-Exempt Investors" below); and
o is not eligible for any reduction in the rate of withholding
tax in the case of a residual certificateholder that is a
foreign investor.
SEE "--NON-U.S. PERSONS" below. The exception for thrift institutions is
available only to the institution holding the residual certificate and not to
any affiliate of the institution, unless the affiliate is a subsidiary all the
stock of which, and substantially all the indebtedness of which, is held by the
institution, and which is organized and operated exclusively in connection with
the organization and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any
residual certificateholder, the excess inclusions for any calendar quarter is
the EXCESS, if any, of
o the income of the residual certificateholder for that calendar
quarter from its residual certificate
over
o the sum of the "daily accruals" for all days during the
calendar quarter on which the residual certificateholder holds
the residual certificate.
For this purpose, the daily accruals with respect to a residual certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" of the residual certificate at the
beginning of the calendar quarter and 120% of the "Federal long-term rate" in
effect at the time the residual certificate is issued. For this purpose, the
"adjusted issue price" of a residual certificate at the beginning of any
calendar quarter equals the issue price of the residual certificate, increased
by the amount of daily accruals for all prior quarters, and decreased (but not
below zero) by the aggregate amount of payments made on the residual certificate
before the beginning of such quarter. The "Federal long-term rate" is an average
of current yields on Treasury securities with a remaining term of greater than
nine years, computed and published monthly by the IRS.
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In the case of any residual certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such residual
certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, excluding
any net capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by the shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
residual certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.
The Small Business Job Protection Act of 1996 has eliminated the
special rule permitting section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from residual certificates that have "significant value" within
the meaning of the REMIC Regulations, effective for taxable years beginning
after December 31, 1995 except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act provides three rules
for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual certificateholder. First, the alternative minimum
taxable income for the residual certificateholder is determined without regard
to the special rule that taxable income cannot be less than excess inclusion.
Second, the amount of any alternative minimum tax net operating loss deductions
must be computed without regard to any excess inclusions. Third, the residual
certificateholder's alternative minimum taxable income for a tax year cannot be
less than excess inclusions for the year. The effect of this last statutory
amendment is to prevent the use of nonrefundable tax credits to reduce a
taxpayer's income tax below its tentative minimum tax computed only on excess
inclusions. These rules are effective for tax years beginning after December 31,
1996, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
PAYMENTS. Any distribution made on a residual certificate to a residual
certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the residual certificateholder's adjusted basis in the
residual certificate. To the extent a distribution exceeds such adjusted basis,
it will be treated as gain from the sale of the residual certificate.
PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders of
the residual certificates. In the case of a "single class REMIC", however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the holders of the regular certificates
and the holders of the residual certificates on a daily basis in proportion to
the relative amounts of income accruing to each certificateholder on that day.
In the case of individuals (or trusts, estates or other persons who compute
their income in the same manner as individuals) who own an interest in a regular
certificate directly or through a pass-through entity which is required to pass
miscellaneous itemized deductions through to its owners or beneficiaries (E.G.,
a partnership, an S corporation or a grantor trust), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. The reduction or disallowance of this deduction coupled with the
allocation of additional income may have a
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significant impact on the yield of the regular certificate to such a holder.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable prospectus supplement, the expenses of the REMIC will
be allocated to holders of the related residual certificates in their entirety
and not to holders of the related regular certificates.
SALE OR EXCHANGE OF RESIDUAL CERTIFICATES. If a residual certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the residual certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a residual certificate generally equals the cost of the residual certificate
to the residual certificateholder, increased by the taxable income of the REMIC
that was included in the income of the residual certificateholder with respect
to the residual certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to the residual certificateholder
with respect to the residual certificate and by the distributions received
thereon by the residual certificateholder. In general, any such gain or loss
will be capital gain or loss provided the residual certificate is held as a
capital asset. However, residual certificates will be "evidences of
indebtedness" within the meaning of section 582(c)(1) of the Code, so that gain
or loss recognized from sale of a residual certificate by a bank or thrift
institution to which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a residual certificate reacquires the residual certificate or acquires
any other residual certificate, any residual interest in another REMIC or
similar interest in a "taxable mortgage pool" (as defined in section 7701(i)) of
the Code during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of section 1091 of the Code. In that event, any loss realized by the residual
certificateholder on the sale will not be deductible, but instead will increase
the residual certificateholder's adjusted basis in the newly acquired asset.
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
L. Prohibited Transactions and Other Taxes
The REMIC is subject to a tax at a rate equal to 100% of the net income
derived from "prohibited transactions". In general, a prohibited transaction
means the disposition of a mortgage loan other than pursuant to certain
specified exceptions, the receipt of investment income from a source other than
a mortgage loan or certain other permitted investments or the disposition of an
asset representing a temporary investment of payments on the mortgage loans
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pending payment on the residual certificates or regular certificates. In
addition, the assumption of a mortgage loan by a subsequent purchaser could
cause the REMIC to recognize gain which would also be subject to the 100% tax on
prohibited transactions.
In addition, certain contributions to a REMIC made after the initial
issue date of the certificates could result in the imposition of a tax on the
REMIC equal to 100% of the value of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related prospectus supplement, such tax would be
borne first by the residual securityholders, to the extent of amounts
distributable to them, and then by the master servicer.
M. Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning
of section 860F(a)(4)(A)(i) of the Code, which may be accomplished by
designating in the REMIC's final tax return a date on which such adoption is
deemed to occur, and sells all of its assets (other than cash) within a 90-day
period beginning on such date, the REMIC will not be subject to any prohibited
transaction tax, provided that the REMIC credits or distributes in liquidation
all of the sale proceeds plus its cash (other than the amounts retained to meet
claims) to holders of regular and residual certificates within the 90-day
period.
The REMIC will terminate shortly following the retirement of the
regular certificates. If a residual certificateholder's adjusted basis in the
residual certificate exceeds the amount of cash distributed to the residual
certificateholder in final liquidation of its interest, it would appear that the
residual certificateholder would be entitled to a loss equal to the amount of
such excess. It is unclear whether such a loss, if allowed, will be a capital
loss or an ordinary loss.
N. Administrative Matters
Solely for the purpose of the administrative provisions of the Code,
the REMIC will be treated as a partnership and the residual securityholders will
be treated as the partners. Under temporary regulations, however, if there is at
no time during the taxable year more than one residual certificateholder, a
REMIC shall not be subject to the rules of subchapter C of chapter 63 of the
Code relating to the treatment of partnership items for a taxable year.
Accordingly, the REMIC will file an annual tax return on Form 1066, U.S. Real
Estate Mortgage Investment Conduit Income Tax Return. In addition, certain other
information will be furnished quarterly to each residual certificateholder who
held the residual certificate on any day in the previous calendar quarter.
Each residual certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
residual certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. Any person that holds a residual
certificate as a nominee for
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another person may be required to furnish the REMIC, in a manner to be provided
in Treasury regulations, with the name and address of such person and other
information.
O. Tax-Exempt Investors
Any residual certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of section 512 of the Code will be subject to
such tax on that portion of the distributions received on a residual certificate
that is considered an "excess inclusion." SEE "--Residual Certificates--EXCESS
INCLUSIONS" above.
P. Non-U.S. Persons
Amounts paid to residual securityholders who are not U.S. Persons (see
"--Regular Certificates--Non-U.S. Persons" above) are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to residual securityholders should qualify as "portfolio
interest", subject to the conditions described in "--Regular Certificates"
above, but only to the extent that the mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a residual
certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. SEE "--Residual Certificates--Excess
Inclusions" above. If the portfolio interest exemption is unavailable, such
amount will be subject to United States withholding tax when paid or otherwise
distributed (or when the residual certificate is disposed of) under rules
similar to those for withholding upon disposition of debt instruments that have
OID. The Code, however, grants the Treasury authority to issue regulations
requiring that those amounts be taken into account earlier than otherwise
provided where necessary to prevent avoidance of tax (e.g., where the residual
certificates do not have significant value). SEE "--Residual
Certificates--Excess Inclusions" above. If the amounts paid to residual
securityholders that are not U.S. Persons are effectively connected with their
conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding tax will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U. S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of residual
certificates, SEE "--Tax-Related Restrictions on Transfers of Residual
Certificates" below.
Regular securityholders and persons related to such holders should not
acquire any residual certificates, and residual securityholders and persons
related to residual securityholders should not acquire any regular certificates
without consulting their tax advisors as to the possible adverse tax
consequences of such acquisition.
Q. Tax-Related Restrictions on Transfers of Residual Certificates
DISQUALIFIED ORGANIZATIONS. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations". Further, a tax is
imposed on the transfer of a residual interest in a REMIC to a disqualified
organization. The amount of the tax equals the product of
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o an amount (as determined under the REMIC Regulations) equal to
the present value of the total anticipated "excess inclusions"
with respect to such interest for periods after the transfer
multiplied by
o the highest marginal federal income tax rate applicable to
corporations.
The tax is imposed on the transferor unless the transfer is through an agent
(including a broker or other middlemen) for a disqualified organization, in
which event the tax is imposed on the agent. The person otherwise liable for the
tax shall be relieved of liability for the tax if the transferee furnished to
such person an affidavit that the transferee is not a disqualified organization
and, at the time of the transfer, such person does not have actual knowledge
that the affidavit is false. A "disqualified organization" means
o the United States, any state, possession, or political
subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the
foregoing (provided that such term does not include an
instrumentality if all its activities are subject to tax and,
except for Freddie Mac, a majority of its board of directors
is not selected by any such governmental agency),
o any organization (other than certain farmers' cooperatives)
generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business
taxable income",
o a rural electric or telephone cooperative, and
o electing large partnerships.
A tax is imposed on a "pass-through entity" holding a residual interest
in a REMIC if at any time during the taxable year of the pass-through entity a
disqualified organization is the record holder of an interest in such entity.
The amount of the tax is equal to the product of
o the amount of excess inclusions for the taxable year allocable
to the interest held by the disqualified organization, and
o the highest marginal federal income tax rate applicable to
corporations.
The pass-through entity otherwise liable for the tax, for any period during
which the disqualified organization is the record holder of an interest in such
entity, will be relieved of liability for the tax if such record holder
furnishes to such entity an affidavit that such record holder is not a
disqualified organization and, for such period, the pass-through entity does not
have actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means
o a regulated investment company, real estate investment trust
or common trust fund,
o a partnership, trust or estate, and
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o certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will, with
respect to such interest, be treated as a pass-through entity. The tax on
pass-through entities is generally effective for periods after March 31, 1988,
except that in the case of regulated investment companies, real estate
investment trusts, common trust funds and publicly-traded partnerships the tax
shall apply only to taxable years of such entities beginning after December 31,
1988.
In order to comply with these rules, the pooling and servicing
agreement will provide that no record or beneficial ownership interest in a
residual certificate may be, directly or indirectly, purchased, transferred or
sold without the express written consent of the master servicer. The master
servicer will grant such consent to a proposed transfer only if it receives the
following: (i) an affidavit from the proposed transferee to the effect that it
is not a disqualified organization and is not acquiring the residual certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the residual
certificate.
NON-ECONOMIC RESIDUAL CERTIFICATES. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a non-economic residual
certificate to a U.S. Person, unless no significant purpose of the transfer is
to enable the transferor to impede the assessment or collection of tax. A
"non-economic residual certificate" is any residual certificate (including a
residual certificate with a positive value at issuance) unless at the time of
transfer, taking into account the prepayment assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents,
o the present value of the expected future distributions on the
residual certificate at least equals the product of the
present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in
which the transfer occurs, and
o the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an
amount sufficient to satisfy the accrued taxes.
A significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A transferor is presumed not to have such
knowledge if
o the transferor conducted a reasonable investigation of the
transferee's financial condition and found that the transferee
had historically paid its debts as they come due and found no
evidence to indicate that the transferee would not continue to
pay its debts in the future; and
o the transferee acknowledges to the transferor that the
residual interest may generate tax liabilities in excess of
the cash flow and the transferee represents that it intends to
pay such taxes associated with the residual interest as they
become due.
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Final Treasury regulations issued on July 18, 2002 (the "New REMIC
Regulations"), provide that transfers of non-economic residual interests must
meet two additional requirements to qualify for the safe harbor:
o the transferee must represent that it will not cause income
from the non-economic residual interest to be attributable to
a foreign permanent establishment or fixed base (within the
meaning of an applicable income tax treaty, hereafter a
"foreign branch") of the transferee or another U.S. taxpayer;
and
o the transfer must satisfy either an "asset test" or a "formula
test" provided under the REMIC Regulations.
A transfer to an "eligible corporation," generally a domestic
corporation, will satisfy the asset test if:
o at the time of the transfer, and at the close of each of the
transferee's two fiscal years preceding the transferee's
fiscal year of transfer, the transferee's gross and net assets
for financial reporting purposes exceed $100 million and $10
million, respectively, in each case, exclusive of any
obligations of certain related persons;
o the transferee agrees in writing that any subsequent transfer
of the interest will be to another eligible corporation in a
transaction that satisfies the asset test, and the transferor
does not know or have reason to know that the transferee will
not honor these restrictions on subsequent transfers, and
o a reasonable person would not conclude, based on the facts and
circumstances known to the transferor on or before the date of
the transfer (specifically including the amount of
consideration paid in connection with the transfer of the
non-economic residual interest), that the taxes associated
with the residual interest will not be paid.
In addition, the direct or indirect transfer of the residual interest
to a foreign branch of a domestic corporation is not treated as a transfer to an
eligible corporation under the asset test.
The formula test provides that the transfer of a non-economic residual
interest will not qualify under the formula test unless the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of
o any consideration given to the transferee to acquire the
interest (the inducement payment),
o future distributions on the interest, and
o any anticipated tax savings associated with holding the
interest as the REMIC generates losses.
For purposes of this calculation, the present value is calculated using
a discount rate equal to the lesser of the applicable federal rate and the
transferee's cost of borrowing.
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If the transferee has been subject to the alternative minimum tax in
the preceding two years and will compute its taxable income in the current
taxable year using the alternative minimum tax rate, then it may use the
alternative minimum tax rate in lieu of the corporate tax rate. In addition, the
direct or indirect transfer of the residual interest to a foreign branch of a
domestic corporation is not treated as a transfer to an eligible corporation
under the formula test.
The New REMIC Regulations generally apply to transfers of non-economic
residual interests occurring on or after February 4, 2000. The requirement of a
representation that a transfer of a non-economic residual interest is not made
to a foreign branch of a domestic corporation and the requirement of using the
short term applicable federal rate for purposes of the formula test apply to
transfers occurring on or after August 19, 2002.
If a transfer of a non-economic residual certificate is disregarded,
the transferor would continue to be treated as the owner of the residual
certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
residual certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person, unless such transferee's income in
respect of the residual certificate is effectively connected with the conduct of
a United States trade or business. A residual certificate is deemed to have a
tax avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee amounts that
will equal at least 30% of each excess inclusion and that such amounts will be
distributed at or after the time the excess inclusion accrues and not later than
the end of the calendar year following the year of accrual. If the non-U.S.
Person transfers the residual certificate to a U.S. Person, the transfer will be
disregarded and the foreign transferor will continue to be treated as the owner,
if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions. The provisions in the REMIC Regulations regarding
transfers to foreign persons of residual certificates that have tax avoidance
potential are effective for all transfers after June 30, 1992. The pooling and
servicing agreement will provide that no record or beneficial ownership interest
in a residual certificate may be, directly or indirectly, transferred to a
non-U.S. Person unless such person provides the trustee with a duly completed
IRS Form W-8ECI and the trustee consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in residual certificates are advised to consult
their own tax advisors with respect to transfers of the residual certificates
and, in addition, pass-through entities are advised to consult their own tax
advisors with respect to any tax which may be imposed on a pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in this
prospectus under "Material Federal Income Tax Considerations" above, potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the certificates. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of
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any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various tax consequences of investments in
the certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. The
related prospectus supplement will contain information concerning considerations
relating to ERISA and the Code that are applicable to the particular securities
offered by the prospectus supplement.
ERISA imposes requirements on certain employee benefit plans (and the
Code imposes requirements on certain other retirement plans and arrangements,
including individual retirement accounts and annuities and Keogh plans) as well
as on collective investment funds and separate accounts in which these plans,
accounts or arrangements are invested, and on persons who bear specified
relationships to these types of plans or arrangements ("Parties in Interest") or
are fiduciaries with respect to these types of plans or arrangements. In this
prospectus we refer to these types of plans and arrangements as "Plans."
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires that the assets of a Plan be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and discretion to
manage and control the assets of the Plan. ERISA also imposes certain duties on
persons who are fiduciaries of Plans, such as the duty to invest prudently, to
diversify investments unless it is prudent not to do so, and to invest in
accordance with the documents governing the Plan. Under ERISA, any person who
exercises any authority or control respecting the management or disposition of
the assets of a Plan is considered to be a fiduciary of that Plan (subject to
certain exceptions not here relevant). In addition to the imposition of general
fiduciary standards of investment prudence and diversification, ERISA and
Section 4975 of the Code prohibit a broad range of transactions involving Plan
assets and Parties in Interest, and impose additional prohibitions where Parties
in Interest are fiduciaries with respect to a Plan. Certain Parties in Interest
that participate in a prohibited transaction may be subject to excise taxes
imposed pursuant to Section 4975 of the Code, or penalties imposed pursuant to
Section 502(i) of ERISA, unless a statutory, regulatory or administrative
exemption is available.
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA) and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to ERISA's requirements. Accordingly, assets of such plans may be
invested in securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable federal, state and
local law. Moreover, any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
The DOL issued regulations concerning the definition of what
constitutes the assets of a Plan (Labor Reg. Section 2510.3-101). Under this
Plan Assets Regulation, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment could be deemed, for purposes of ERISA, to be assets of the
investing Plan in certain circumstances.
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The Plan Assets Regulation provides that, generally, the assets of an
entity in which a Plan invests will not be deemed to be assets of the Plan for
purposes of ERISA if the equity interest acquired by the investing Plan is a
"publicly-offered security", or if equity participation by "benefit plan
investors" is not "significant". In general, a publicly-offered security, as
defined in the Plan Assets Regulation, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934. Equity
participation in an entity by "benefit plan investors" is not significant if,
after the most recent acquisition of an equity interest in the entity, less than
25% of the value of each class of equity interest in the entity is held by
benefit plan investors, which include benefit plans described in ERISA or under
Section 4975 of the Code, whether or not they are subject to ERISA, as well as
entities the underlying assets of which include assets of the benefit plan by
reason of investment in the entity by the benefit plan.
If no exception under the Plan Assets Regulation applies and if a Plan
(or a person investing assets of a Plan, such as an insurance company general
account) acquires an equity interest in the trust, then the assets of the trust
could be considered to be assets of the Plan. In that event, the master servicer
and other persons exercising management or discretionary control over the assets
of the trust or providing services with respect to those assets could be deemed
to be Parties in Interest with respect to investing Plans; this would subject
the master servicer and such other persons to the fiduciary responsibility
provisions of Title I of ERISA to the extent that they exercised discretionary
control of Plan assets, and to the prohibited transaction provisions of Section
406 of ERISA and Section 4975 of the Code with respect to transactions involving
the assets of the trust. Because the loans held by the trust may be deemed
assets of each Plan that purchases an equity interest, an investment in an
equity interest issued by the trust by a Plan might be a prohibited transaction
under ERISA and subject to an excise tax under Section 4975 of the Code, and may
cause transactions undertaken in the course of operating the trust to constitute
prohibited transactions, unless a statutory, regulatory or administrative
exemption applies.
Without regard to whether securities are considered to be equity
interest in the trust, the trust, certain affiliates of the trust (including the
holder of the trust certificate), or a seller of a security (including an
underwriter) might be considered or might become Parties in Interest with
respect to a Plan. In this case, the acquisition or holdings of the securities
by or on behalf of the Plan could constitute or give rise to a prohibited
transaction, within the meaning of ERISA and the Code, unless they were subject
to one or more exemptions. Depending on the relevant facts and circumstances,
certain prohibited transaction exemptions may apply to the purchase or holding
of securities-for example, Prohibited Transaction Class Exemption ("PTCE")
96-23, which exempts certain transactions effected on behalf of a Plan by an
"in-house asset manager"; PTCE 95-60, which exempts certain transactions by
insurance company general accounts; PTCE 91-38, which exempts certain
transactions by bank collective investment funds; PTCE 90-1, which exempts
transactions by insurance company pooled separate accounts; or PTCE 84-14; which
exempts certain transactions effected on behalf of a Plan by a "qualified
professional asset manager". There can be no assurance that any of these
exemptions will apply with respect to any Plan's investment in securities, or
that such an exemption, if it did apply, would apply to all prohibited
transactions that may occur in connection with the investment. Furthermore,
these exemptions would not apply to transactions involved in operation of the
trust if, as described above, the assets of the trust were considered to include
Plan assets.
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INSURANCE COMPANY GENERAL ACCOUNTS
The United States Department of Labor (DOL) has published final
regulations under Section 401(c) of ERISA describing a safe harbor for insurers
that, on or before December 31, 1998, issued certain non-guaranteed policies
supported by their general accounts to Plans (Labor Reg. Section 2550.401c-1).
Under this regulation, an insurer will not be considered an ERISA fiduciary with
respect to its general account by virtue of a Plan's investment in such a
policy. In general, to meet the safe harbor, an insurer must
o disclose certain specified information to investing Plan
fiduciaries initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days'
notice to the insurer, and to elect, without penalty, either a
lump-sum payment or annual installment payments over a
ten-year period, with interest; and
o give Plans written notice of "insurer-initiated amendments" 60
days before the amendments take effect.
PROHIBITED TRANSACTION CLASS EXEMPTION 83-1
Any fiduciary or other Plan asset investor that proposes to purchase
securities on behalf of a Plan or with Plan assets should consult with its
counsel on the potential applicability of ERISA and the Code to that investment
and the availability of any prohibited transaction class exemption in connection
therewith. In particular, in connection with a contemplated purchase of
securities representing a beneficial ownership interest in a pool of
single-family residential mortgages, the fiduciary should consider the
availability of PTCE 83-1 for various transactions involving mortgage pool
investment trusts. PTCE 83-1 permits, subject to certain conditions,
transactions that might otherwise be prohibited between Plans and Parties in
Interest with respect to those plans related to the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in those mortgage pools by Plans. However, PTCE 83-1
does not provide exemptive relief with respect to securities evidencing
interests in trusts which include mortgage loans secured by third or more junior
liens, revolving credit loans, loans on unimproved land, contracts, cooperative
loans, multifamily or mixed-use mortgage loans or some types of private
securities, or which contain a swap or a pre-funding arrangement. In addition,
PTCE 83-1 does not provide exemptive relief for transactions involving
subordinated securities. The prospectus supplement may indicate whether it is
expected that PTCE 83-1 will apply to securities offered by that prospectus
supplement.
UNDERWRITER EXEMPTION
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc.
an underwriter exemption (PTE 90-59, Application No. D-8374, 55 Fed. Reg. 36724
(1990)) (the "Exemption") from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, holding and subsequent resale by Plans of
"securities" that are obligations of an issuer containing certain receivables,
loans and
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other obligations, and with respect to which Greenwich Capital Markets, Inc. is
the underwriter, manager or co-manager of an underwriting syndicate. The
Exemption, which was amended and expanded by PTE 97-34, 62 Fed. Reg. 39021
(1997); PTE 2000-58, 65 Fed. Reg. 67765 (2000); and PTE 2002-41, 67 Fed. Reg.
54487 (2002), provides relief which is generally similar to that provided by
PTCE 83-1, but is broader in several respects.
The Exemption contains a number of requirements. It does not apply to
any investment pool unless, among other things, the investment pool satisfies
the following conditions:
o the investment pool consists only of assets of a type which
have been included in other investment pools;
o securities evidencing interests in such other investment pools
have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of securities
pursuant to the exemption; and
o securities in such other investment pools have been rated in
one of the three (or four, if the investment pool contains
certain types of assets) highest generic rating categories by
one of the credit rating agencies noted below.
The Exemption sets forth general conditions which must be satisfied for a
transaction to be eligible for exemptive relief thereunder. Generally, the
Exemption holds that the acquisition of the securities by a Plan must be on
terms (including the price for the securities) that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party. The Exemption requires that the rights and interests evidenced by the
securities not be "subordinated" to the rights and interests evidenced by other
securities of the same trust, except when the trust holds certain types of
assets. The Exemption requires that securities acquired by a Plan have received
a rating at the time of their acquisition that is in one of the three (or four,
if the trust holds certain types of assets) highest generic rating categories of
Standard & Poor's, Moody's Investors Service, Inc. or Fitch Ratings. The
Exemption specifies that the pool trustee must not be an affiliate of any other
member of the "Restricted Group" (defined below), other than the underwriter.
The Exemption stipulates that any Plan investing in the securities must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933, as amended. The Exemption requires that
certain payments made in connection with the creation and operation of the trust
and the sale of its securities be reasonable. Finally, the Exemption requires
that, depending on the type of issuer, the documents establishing the issuer and
governing the transaction contain certain provisions to protect the assets of
the issuer, and that the issuer receive certain legal opinions.
If an issuer holds obligations that have high loan-to-value ratios, the
Exemption may apply to only the issuer's non-subordinated securities rated in
one of the two highest generic rating categories by at least one of the rating
agencies named in the Exemption if both of the following conditions are met:
o the obligations are residential or home equity loans, and
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o the fair market value of the real property collateral securing
the loan on the closing date is at least 80% of the sum of the
outstanding principal balance of the loan held in the
investment pool and the outstanding principal balance of any
other loan of higher lien priority secured by the same real
property collateral.
Moreover, the Exemption generally provides relief from certain
self-dealing and conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire securities of an issuer holding
receivables as to which the fiduciary (or its affiliate) is an obligor, provided
that, among other requirements:
o in the case of an acquisition in connection with the initial
issuance of securities, at least 50% of each class of
securities in which Plans have invested and at least 50% of
the aggregate interest in the issuer is acquired by persons
independent of the Restricted Group;
o the fiduciary (or its affiliate) is an obligor with respect to
not more than 5% of the fair market value of the obligations
contained in the issuer;
o the Plans' investment in securities of any class does not
exceed 25% of all of the securities of that class outstanding
at the time of the acquisition; and o immediately after the
acquisition, no more than 25% of the assets of any Plan with
respect to which the person is a fiduciary is invested in
securities representing an interest in one or more issuers
containing assets sold or serviced by the same entity.
This relief is not available to Plans sponsored by the "Restricted
Group", which consists of the seller, the underwriter, the trustee, the master
servicer, any servicer, any counterparty of a permitted swap or notional
principal contract or any insurer with respect to the mortgage loans, any
obligor with respect to mortgage loans included in the investment pool
constituting more than 5% of the aggregate principal balance of the assets in
the investment pool, or any affiliate of those parties, and in general the
Exemption provides only limited relief to such Plans.
If pre-funding is anticipated, the Exemption extends exemptive relief
to securities issued in transactions using pre-funding accounts, whereby a
portion of the loans backing the securities are transferred to the trust fund
within a specified period following the closing date (the "DOL Pre-Funding
Period"), when the conditions of the Exemption are satisfied and the pre-funding
accounts meet certain requirements.
The Exemption, as amended, extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions involving trusts that
contain an interest rate swap, provided the swap satisfies certain criteria and
the other requirements of the Exemption are met. Among other requirements, the
counterparty to the swap must maintain ratings at certain levels from Exemption
rating agencies, and the documentation for the swap must provide for certain
remedies if the rating declines. The swap must be an interest rate swap
denominated in U.S. dollars, may not be leveraged, and must satisfy several
other criteria. Securities of any class affected by the swap may be sold to Plan
investors only if they are "qualified plan investors" that satisfy several
requirements relating to their ability to understand the terms of the swap and
the effects of the swap on the risks associated with an investment in the
security.
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The rating of a security may change. If a class of securities no longer
satisfies the applicable rating requirement of the Exemption, securities of that
class will no longer be eligible for relief under the Exemption (although a Plan
that had purchased the security when it had an appropriate rating would not be
required by the Exemption to dispose of it).
The prospectus supplement for each series of securities will indicate
the classes of securities, if any, offered thereby as to which it is expected
that the Exemption will apply.
In the case of certain types of securities, transfer of the securities
will not be registered unless the transferee represents that it is not, and is
not purchasing on behalf of, or with assets of, a plan, account or other
retirement arrangement or provides an opinion of counsel or a certification,
which opinion of counsel or certification will not be at the expense of the
trustee or depositor, satisfactory to the trustee and the depositor that the
purchase of the securities by or on behalf of, or with assets of, a plan,
account or other retirement arrangement is permissible under applicable law,
will not give rise to a non-exempt prohibited transaction under ERISA or Section
4975 of the Code and will not subject the trustee, the master servicer or the
depositor to any obligation or liability in addition to those undertaken in the
operative agreements.
Any Plan fiduciary which proposes to cause a Plan to purchase
securities should consult with their counsel concerning the impact of ERISA and
the Code, the applicability of the Exemption or any other available exemption,
and the potential consequences in their specific circumstances, prior to making
such investment. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment prudence and diversification an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The prospectus supplement for each series of certificates will specify
which, if any, of those classes of certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended (SMMEA). Classes of certificates that qualify as "mortgage
related securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of these entities with respect to "mortgage related
securities," certificates will constitute legal investments for entities subject
to the legislation only to the extent provided therein. Approximately twenty-one
states adopted the legislation prior to the October 4, 1991 deadline. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
certificates, or require the sale or other disposition of certificates, so long
as such contractual commitment was made or such certificates were acquired prior
to the enactment of the legislation.
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SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
certificates without limitations as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase certificates for their own account
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration (NCUA)
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108,
which includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
All depository institutions considering an investment in the
certificates (whether or not the class of certificates under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators),
setting forth, in relevant part, certain securities trading and sales practices
deemed unsuitable for an institution's investment portfolio, and guidelines for
(and restrictions on) investing in mortgage derivative products, including
"mortgage related securities", which are "high-risk mortgage securities" as
defined in the Policy Statement. According to the Policy Statement, "high-risk
mortgage securities" include securities such as certificates not entitled to
distributions allocated to principal or interest, or subordinated certificates.
Under the Policy Statement, it is the responsibility of each depository
institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a "high-risk
mortgage security", and whether the purchase (or retention) of such a product
would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
The Office of Thrift Supervision, or OTS, has issued Thrift Bulletin
73a, entitled "Investing in Complex Securities" ("TB 73a"), which applies to
savings associations regulated by the OTS, and Thrift Bulletin 13a, entitled
"Management of Interest Rate Risk, Investment Securities, and Derivatives
Activities" ("TB 13a"), which applies to thrift institutions regulated by the
OTS.
One of the primary purposes of TB 73a is to require savings
associations, prior to taking any investment position, to determine that the
investment position meets applicable regulatory and policy requirements
(including those set forth TB 13a (see below)) and internal guidelines, is
suitable for the institution, and is safe and sound. OTS recommends, with
respect to purchases of specific securities, additional analyses, including,
among others, analysis of repayment terms, legal structure, expected performance
of the issuer and any underlying assets as well as analysis of the effects of
payment priority, with respect to security which is divided into separate
tranches
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with unequal payments, and collateral investment parameters, with
respect to a security that is prefunded or involves a revolving period. TB 73a
reiterates the due diligence requirements of the OTS for investing in all
securities and warns that if a savings association makes an investment that does
not meet the applicable regulatory requirements, the savings association's
investment practices will be subject to criticism, and OTS any require
divestiture of such securities. OTS also recommends, with respect to an
investment in any "complex securities," that savings associations should take
into account quality and suitability, interest rate risk and classification
factors. For the purpose of each of TB 73a and TB 13a, the term "complex
security" includes among other things any collateralized mortgage obligation or
real estate mortgage investment conduit security, other than any "plain vanilla"
mortgage pass-through security (I.E., securities that are part of a single class
of securities in the related pool that are non-callable and do not have any
special features). Accordingly, all Classes of the Offered Certificates would
likely be viewed as "complex securities." With respect to quality and
suitability factors, TB 73a warns (i) that a savings association's sole reliance
on outside ratings for material purchases of complex securities is an unsafe and
unsound practice, (ii) that a savings association should only use ratings and
analyses from nationally recognized rating agencies in conjunction with, and in
validation of, its own underwriting processes, and (iii) that it should not use
ratings as a substitute for its own thorough underwriting analyses. With respect
the interest rate risk factor, TB 73a recommends that savings associations
should follow the guidance set forth in TB 13a. With respect to collateralized
loan or bond obligations, TB 73a also requires that the savings associations
meet similar requirements with respect to the underlying collateral, and warns
that investments that are not fully rated as to both principal and interest do
not meet OTS regulatory requirements.
One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position, to (i) conduct a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives, and (ii) conduct a pre-purchase
price sensitivity analysis of any "complex security" or financial derivative.
The OTS recommends that a thrift institution should conduct its own in-house pre
acquisition analysis, although it may rely on an analysis conducted by an
independent third-party as long as management understands the analysis and its
key assumptions. Further, TB 13a recommends that the use of "complex securities
with high price sensitivity" be limited to transactions and strategies that
lower a thrift institution's portfolio interest rate risk. TB 13a warns that
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by OTS
examiners as an unsafe and unsound practice.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase certificates or to
purchase certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the certificates constitute legal
investments for them.
METHOD OF DISTRIBUTION
The certificates offered by this prospectus and by the related
prospectus supplement will be offered in series. The distribution of the
certificates may be effected from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
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varying prices to be determined at the time of sale or at the time of commitment
therefor. If so specified in the related prospectus supplement and subject to
the receipt of any required approvals from the Board of Governors of the Federal
Reserve System, the certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Greenwich Capital Markets, Inc. (GCM) acting as underwriter with other
underwriters, if any, named in the prospectus supplement. In such event, the
related prospectus supplement may also specify that the underwriters will not be
obligated to pay for any certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the depositor. In connection with
the sale of the certificates, underwriters may receive compensation from the
depositor or from purchasers of the certificates in the form of discounts,
concessions or commissions. The related prospectus supplement will describe any
compensation paid by the depositor.
Alternatively, the related prospectus supplement may specify that the
certificates will be distributed by GCM acting as agent or in some cases as
principal with respect to certificates that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of certificates, GCM will
receive a selling commission with respect to each series of certificates,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related mortgage assets as of the cut-off date. The
exact percentage for each series of certificates will be disclosed in the
related prospectus supplement. To the extent that GCM elects to purchase
certificates as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The prospectus
supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the depositor and purchasers of
certificates of that series.
The depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make in
respect of those liabilities.
In the ordinary course of business, GCM and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of the mortgage loans or interests in the loans, including the certificates.
The depositor anticipates that the certificates will be sold primarily
to institutional investors. Purchasers of certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, in connection
with reoffers and sales of certificates by them. Holders of certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the certificates of each series, including certain
material federal income tax consequences with respect to the certificates, will
be passed upon for the depositor by Sidley Austin Brown & Wood LLP, 787 Seventh
Avenue, New York, New York 10019, or by Thacher
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Proffitt & Wood LLP, Two World
Financial Center, New York, New York 10281, as specified in the related
prospectus supplement.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of
certificates and no trust fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
certificates. Accordingly, no financial statements with respect to any trust
fund will be included in this Prospectus or in the related prospectus
supplement.
AVAILABLE INFORMATION
The depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the certificates. This
prospectus, which forms a part of the Registration Statement, and the prospectus
supplement relating to each series of certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the Registration Statement and the exhibits thereto. The Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference
Section, 450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC
maintains a website at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the depositor, that file electronically with the SEC.
RATINGS
It is a condition to the issuance of the certificates of each series
offered by this prospectus and the accompanying prospectus supplement that they
shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
related prospectus supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped pass-through certificates in certain cases might fail to
recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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GLOSSARY OF TERMS
AGENCY SECURITIES: Mortgage pass-through securities issued or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.
HOME EQUITY LOANS: Closed end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential properties.
HOME IMPROVEMENT CONTRACTS: Home improvement installment sales
contracts and loan agreements that are either unsecured or secured by senior or
junior liens on one- to four-family residential or mixed-use properties or by
purchase money security interests in the related home improvements.
INSURANCE PROCEEDS: All proceeds of the related hazard insurance
policies and any primary mortgage insurance policies to the extent the proceeds
are not applied to property restoration or released to mortgagors in accordance
with the master servicer's normal servicing procedures, net of insured expenses
including unreimbursed payments of property taxes, insurance premiums and other
items incurred by any related sub-servicer and net of reimbursed advances made
by the sub-servicer.
LIQUIDATION PROCEEDS: All cash amounts (other than Insurance Proceeds)
received and retained in connection with the liquidation of defaulted mortgage
loans, by foreclosure or otherwise, net of unreimbursed liquidation and
foreclosure expenses incurred by any related sub-servicer and net of
unreimbursed advances made by the sub-servicer.
MANUFACTURED HOUSING CONTRACTS: Conditional sales contracts and
installment sales or loan agreements secured by manufactured housing.
MULTIFAMILY LOANS: First lien mortgage loans, or participation
interests in the loans, secured by residential properties consisting of five or
more residential units, including cooperative apartment buildings.
PRIVATE LABEL SECURITIES: Mortgage-backed or asset-backed securities
that are not Agency Securities.
REMIC REGULATIONS: Regulations promulgated by the Department of the
Treasury on December 23, 1992 and generally effective for REMICs with start-up
dates on or after November 12, 1991.
SINGLE FAMILY LOANS: First lien mortgage loans, or participation
interests in the loans, secured by one- to four-family residential properties.
U.S. PERSON: Any of the following:
o a citizen or resident of the United States;
o a corporation or a partnership (including an entity treated as
a corporation or partnership for U.S. federal income tax
purposes) organized in or under the laws of
163
the United States, or any State thereof or the District of
Columbia (unless in the case of a partnership Treasury
regulations are adopted that provide otherwise);
o an estate whose income from sources outside the United States
is includible in gross income for federal income tax purposes
regardless of its connection with the conduct of a trade or
business within the United States; or
o a trust if a court within the United States is able to
exercise primary supervision of the administration of the
trust and one or more U.S. Persons have the authority to
control all substantial decisions of the trust.
In addition, certain trusts which would not qualify as U.S.
Persons under the above definition but which are eligible to
and make an election to be treated as U.S. Persons will also
be treated as U.S. Persons.
164
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$300,114,000 (APPROXIMATE)
CHEC LOAN TRUST 2004-1
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
CENTEX HOME EQUITY COMPANY, LLC
ORIGINATOR AND SERVICER
ASSET-BACKED CERTIFICATES, SERIES 2004-1
___________________
PROSPECTUS SUPPLEMENT
___________________
RBS GREENWICH CAPITAL WAMU CAPITAL CORP.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Asset-Backed Certificates, Series 2004-1 in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Certificates, Series 2004-1 and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Asset-Backed Certificates, Series 2004-1 will be required to deliver a
prospectus supplement and prospectus for ninety days following the date of this
prospectus supplement.
July 26, 2004
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